Implications of the U.S. Elections

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For our first installment, we are examining the implications of the recent U.S. elections on private credit.

Takeaway #1: It’s too early to know exactly what President Trump’s economic policies will be, and which economic advisors will have the most sway in the new administration.

It’s tough to forecast whether some of the president-elect’s campaign promises – including his more extreme stance on tariffs, for example – will manifest in actual policy. It’s also challenging to predict the outcome of the various policies proposed during the campaign, should they come into effect. Economists are divided over whether the mix of policies would boost or weaken growth and increase prices.

To that end, lower taxes and looser regulations could drive more investment and increased earnings. But steep tariffs could drive up prices, and tighter immigration might lead to a hotter labor market. Moreover, tax proposals made by the president-elect have the potential to significantly increase the federal debt, which could be inflationary, and, in turn, slow down the pace of rate cuts by the Federal Reserve. On the other hand, the administration has expressed an intent to slash federal spending and streamline government bureaucracy. Only time will tell where government spending and debt will go.

In terms of monetary policy, Fed Chairman Jerome Powell made clear after the post-election rate cut that the Fed will take a meeting-by-meeting approach to determine the pace of any future cuts. The Fed wants to watch how key metrics are trending and how the new administration’s policies affect inflation, growth, and the labor market over time. With so many moving parts, it may be as difficult as ever to determine where the desired neutral rate is.

So, while the conclusion of the elections has taken political uncertainty out of the markets, there are still many remaining areas of uncertainty that could drive market volatility. Investors will need to keep a steady watch over how things play out in the coming months.?

Takeaway #2: Despite those caveats, it’s safe to say that many of the Trump administration’s policies will be pro-business and pro-growth, particularly in the areas of taxes and regulation.

We can say with confidence that the Trump administration is expected to bring a reduction in the corporate tax rate and more lax oversight of everything from banks to energy companies to mergers and acquisitions. That’s why equity markets reacted so positively and aggressively in the immediate aftermath of the election.

Additionally, a Trump administration supported by a Republican Senate and (likely) a Republican House of Representatives will have greater freedom to set economic policy and gain swifter approval of agency nominees and leadership of oversight committees, bringing greater likelihood that the new administration’s agenda is enacted. ?

Takeaway #3: All in all, we remain bullish on the opportunities in private credit going forward.

While there are questions about the new administration’s policies that will become clearer over time, we believe their growth-oriented tax and regulatory policies will create a positive environment for private credit.

Credit fundamentals and yields remain solid, and spreads have continued to rally – driven by continued economic growth, strong fixed-income demand technicals, and the election outcome.

A more-favorable regulatory regime, along with lessened fears of a recession in the near future, should drive an increase in M&A and private credit activity at a time when private equity and private credit firms have significant funds ready to invest. Lower taxes and looser regulations should also support increased business development and investment, driving additional demand for private credit.

That said, one exception may be increased scrutiny of inbound and outbound investment deals in the wake of increased American protectionism.

The Bottom Line

The election has reduced political uncertainty, but it will take time to get clarity on the economic path that the new administration will follow and the implications for investors.

In this evolving and unclear economic environment, private credit offers attractive investment opportunities for investors seeking diversification and strong risk-adjusted returns with downside protection.