What Trump’s return could mean for the economy and markets

In the end, the race turned out to be less of a nail-biter than expected. 

Former President Donald Trump stood tall with a total of 312 electoral votes, while Kamala Harris trailed far behind with 226 votes as of 11 Nov. It became clear that Trump had surged ahead of the Democrat contender, Harris. Republicans also won thin majorities in the House, giving Trump and the party control of government. 

What does Trump’s victory and return to the White House, coupled with a Republican sweep, mean for the US economy and the global markets? 

We gather thoughts from fund managers from Allianz Global Investors, Capital Group, Franklin Templeton, Janus Henderson Investors, PineBridge Investment, PIMCO, and T. Rowe Price. 

A robust US economy meets inflationary policies

This is an excerpt taken from a commentary by T. Rowe Price published in Nov 2024.

The new president is inheriting an economy that is growing robustly. While inflation remains above the Federal Reserve’s 2% target, it has come down materially from the peaks of 2022. 

With respect to economic growth, all eyes are on what happens with the Tax Cuts and Jobs Act. While an extension of expiring provisions could support the economy, the net effect could end up being neutral overall if it means that parts of the Inflation Reduction Act (IRA) are changed to help fund it. 

Additional corporate tax cuts are likely to be difficult to get through given that there is limited fiscal space to increase the deficit further. If they are delivered, it could be positive for growth. However, any positive effect could be offset by uncertainty around tariffs.

On the inflation front, raising existing tariffs and/or imposing additional levies on imports could cause a one-off price shock. The magnitude would depend on the ability of businesses to pass these higher costs along to consumers, which is hard to predict. 

Another area to watch is the new president’s vow to tighten immigration policies. A tough stance here could result in a negative shock to the supply of workers, tightening US labour markets. Unlike higher tariffs, such a scenario likely would have a more sustained impact on prices.

Overall, it’s important to be cautious about the long-term implications of the new administration’s economic policies. The measures eventually adopted could be very different from those promised during the campaign, and there is a lack of detail about costs and implementation. So uncertainty is likely to remain high in the meantime. 

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Trump’s deficit-swelling fiscal stance

Below is an excerpt taken from a commentary by T. Rowe Price published in Nov 2024.

"According to the Congressional Budget Office, the fiscal deficit is high at present and is projected to reach 7% of gross domestic product (GDP) by the end of 2024.

This would be the highest level ever during peacetime and outside of a recession. Although debt service costs are high—currently more than 2% of GDP each year—there were no signs during the campaign that lowering the deficit would be a priority of the new president. Therefore, any improvement on this front seems unlikely. 

Tax cuts extended and more fiscal spending

Below is an excerpt taken from a commentary by PIMCO published on 8 Nov 2024.

For fiscal expansion – taxes and spending – President Trump will still have to go through Congress. This is where the likely narrow majorities could serve as a check.

Assuming Republicans keep the House, a full extension of the expiring Trump tax cuts is likely, but possibly only for a shortened period of time given already high deficits. We could see efforts to reduce spending marginally, but any large cuts will be challenging to get through the House and would be difficult to do via the budget reconciliation process (which only requires 50 votes in the Senate). Everything else likely requires 60 votes.

As we have been saying for months, the deficit was likely to be the biggest loser of the election, with neither candidate inclined to take steps to reduce the deficit and both likely to pass policies that would add to it. The debt ceiling, which will have to be dealt with later in the spring, will likely be lifted easily assuming Republican majorities in both chambers.

Below is an excerpt taken from a commentary by Allianz Global Investors published on 6 Nov 2024.

Trump is promising lavish spending, big tax cuts and deregulation. His proposals could boost near-term growth as well as US company earnings, particularly US small caps and the energy and financial sectors. 

These plans could also raise US government debt by US$7.5 trillion by 2035, according to the Committee for a Responsible Federal Budget, at a time when US national debt-to-GDP is already more than 120%.

We see the potential for credit markets to take fright at unfunded fiscal plans if Republicans gain control of Congress (a red sweep). We think the dollar’s status as a funding and trade currency offers the US some protection from any negative market reaction to fiscal stimulus.

Fiscal largesse – together with higher tariffs, tougher immigration policy and looser regulations – tends to be inflationary. In response, the US Federal Reserve may moderate its easing cycle, potentially supporting the dollar."

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Tariffs, the wild card

This is an excerpt taken from a commentary by Franklin Templeton published on 8 Nov 2024.

Tariffs could be a wild card. Trump has voiced plans for across-the-board tariffs of 10%-20%, and up to 60% on imports from China. We view this as a meaningful tail risk, but not the baseline. Some Republican Senators would probably oppose aggressive across-the-board tariffs, which would then require at least some creative legislative work to bypass Congress. If this tail risk does materialise, what would be the impact?

The tariffs Trump levied during his first term boosted the prices of individual goods, but did not ignite a broader inflationary spike, partly because they came in an environment of generally entrenched price stability. 

Goods inflation rose well before the 2018 tariffs took effect

In Trump’s second term, broad-based tariffs could have a more significant impact on consumer prices, potentially in the range of up to half a percentage point. This jump would be a one-off effect, another bump in the road to disinflation, but not enough to trigger a resurgence of inflation. The impact on growth should be fairly muted, given that the United States is essentially a large, closed economy.

The way tariff policy is put into action could, however, inject unhelpful volatility into the global economy. A trade policy by tweet like we have seen in the past would heighten uncertainty. Moreover, should US tariffs ignite a broader global trade war, this could have more significant adverse consequences for the world economy.

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The Fed under Trump 2.0

The elections were held against the backdrop of the second last FOMC meeting of the year. But what gained more eyeballs was whether, and perhaps to a certain extent, how in legal terms, the President-elect would seek to fire the Fed chair. 

Federal Reserve Chair Jerome Powell made it clear that he would not resign from his position even if President-elect Trump requested it, even though such an action is “not permitted under the law.” When asked if he would leave if Trump asked him to resign, Powell simply replied with a firm "No.”

With the economic backdrop being fairly different from his first term, what will the central bank and policy directions be like under Trump’s second term?

No changes until 2026?

This is an excerpt taken from a commentary by PIMCO published on 8 Nov 2024.

We don’t expect any changes at the Federal Reserve until 2026. Fed Chair Jerome Powell’s term ends in May 2026, and we believe his position is secure until then. The first Fed governor vacancy is not until January 2026. The president cannot fire a Fed governor without cause.

We believe there’s no question about Fed independence. The Fed is ultimately accountable to Congress – which created the Fed and established its mandate – and to the people. Its independence enables the Fed to enact monetary policy based on data, analysis, and judgment, free of political influence.

Read more: How does the US Fed interest rate affect investors?

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Republican sweep and historical market returns

This is an excerpt taken from a commentary by Janus Henderson Investors published on 6 Nov 2024.

Over the longer term, history shows equity markets are more likely to be indifferent to whichever party is in power. A Republican-led White House and Congress has been just as likely to see positive equity returns as a Democrat-led or divided government. That’s because over the long term, what tends to matter most for stock returns are not elections but factors such as corporate earnings, economic growth, and interest rates. The good news on that front: All have been trending positively in the US. 

Equity themes emerging with a Republican sweep

This is an excerpt taken from a commentary by Capital Group published on 7 Nov 2024.

Within equities, a few themes could emerge with a Republican sweep:  

1. Banks and financials: Weaker regulation and lower capital requirements should help the earnings growth of these companies. 
2. Aerospace/defence: Beneficiaries of potential increases in spending driven by sustained geopolitical tensions.
3. Healthcare: Proposed deregulation promotes competition and efficiency. However, lower prices could affect profits and is one of the reasons that large-cap pharmaceutical stocks have declined post the election outcome.
4. Oil and gas: Domestic drilling and mining will be encouraged and deregulated but could result in a lower price per barrel.
5. Industrials: Companies may move manufacturing back to American soil. Assuming tariffs are not onerous, various Japanese and European industrial firms that supply specialised chemicals and niche automation components are well-positioned, based on this pro-cyclical stance.
6. Small-cap companies: Potential beneficiaries of a strong US economy, the reshoring of supply chains and a potential cut in the corporate tax rate.

Below is an excerpt taken from a commentary by PineBridge Investment published on 8 Nov 2024.

Greater policy certainty in the US will help create a baseline from which companies can make spending decisions, potentially launching a new cycle of capex and investment.

We expect deficit spending to keep rising under Trump, and the higher inflation this entails would typically be good for equities as a whole. While our research process remains focused on a bottom-up analysis of specific companies, we are mindful of net exposure to sectors that may be most affected by the shifts in policy.

We expect industrials to continue to benefit from three key long-term trends: near-shoring, green spending, and automation. US industrials will also likely benefit from Trump’s “Made in America” policy leanings, though Trump’s win is likely a net negative for industrials in the rest of the world.

The biggest change may be felt in financials, where under Trump we would expect deregulation, lower taxes, and a potential relaxing of anti-trust regulation to offer clear benefits. Bank stocks have already rallied strongly since the news of Trump’s win.

Trump is generally unfriendly toward Big Tech (with at least one notable exception), and healthcare may also face headwinds, with the IRA’s clampdown on prescription drug pricing set to continue.

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Credit fundamentals likely hold, with the least impact from the election outcome

Below is an excerpt taken from a commentary by PineBridge Investment published on 8 Nov 2024.

We view credit as the area least likely to feel a big impact from the election outcome.

In developed markets, we could see volatility in sectors such as healthcare and technology that have been sensitive historically to changes in government regulation. Additionally, sectors and issuers that faced trade war headwinds during the first Trump presidency will likely feel pressure again, though we note that many such issuers have made material shifts in their supply chains away from China via near-shoring and friend-shoring.

We see more potential risk in emerging market credit, where Trump’s tariff policies will generally be negative for China and emerging markets, particularly Mexico. Though we are cautious on Mexican corporate debt in the medium term given that uncertainty may slow some investment decisions, we believe Mexico and Mexican issuers will benefit from their strong relationship with the US in the longer term. In other parts of Latin America, issuers that export to the US may see a hit to volumes if a universal tariff is implemented, but we would not expect a big impact on these companies’ credit fundamentals.

Regardless of the potential for short-term fluctuations in pricing, we believe that fundamentals remain solid and any bouts of volatility will likely represent opportunities to add risk at more attractive levels.