Week of December 2, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

While President-elect Donald Trump has yet to assume office, he has been hard at work nominating cabinet leads. These picks, although yet to be approved, can help markets decipher how he may govern.

His commitment to being business friendly is already evident in his selection of Scott Bessent to head the U.S. Department of the Treasury and of Harold Lutnick to lead the U.S. Department of Commerce. Both are Wall Street veterans that can ably advise on avoiding adverse market reactions to policy proposals. And while Trump has often sought to appoint cabinet leaders that are non-traditional, here he has opted for experienced hands from within the system. The same can be said with his pick for Department of Energy. He has nominated an industry CEO to lead the department.

One of Trump’s campaign pledges is to expand oil and gas drilling. At a time when voters are worried about prices, campaigning on lower energy bills seemed like a winner. In practice it is more complicated.

The U.S. has already been pumping oil at a record pace for years, leading the world by this measure. Oil prices are near three-year lows. And the global market is oversupplied even as OPEC has worked to limit production. More domestic supply could lower prices, but companies may have little incentive to produce more if margins on new supply materially shrink. Therefore, we think it is encouraging to see the incoming administration add some leadership that understands business dynamics and that can help avoid unintended consequences.

Sources: Bloomberg, Financial Times, 2024.

Valter Lourenco ( Valter L. ), Managing Director, Private Fixed Income

The potential imposition of U.S. tariffs on critical imports such as steel and solar components will likely have a cascading effect, increasing costs across the project lifecycle from construction to ongoing operation and maintenance. For example, the U.S. solar industry imports 80% of its photovoltaic modules from Vietnam, Thailand, Malaysia and Cambodia, and this dependency underscores the vulnerability of clean energy supply chains. Increased costs have to be taken into consideration in non-recourse financing, as it will require additional equity support and/or could erode profitability and contingency margins in an already competitive bidding process for these types of projects.

While the introduction of additional tariffs present challenges, they also create opportunities. Tariffs may incentivize U.S. manufacturing of solar panels and steel, fostering job creation and reducing future reliance on imports. As costs rise, public funds and subsidies could play a pivotal role in bridging financing gaps, creating avenues for collaboration between government and private capital. Close collaboration across all stakeholders from policymakers to equity sponsors and institutional investors would be required to mitigate tariff impacts.

Sources: S&P Global Market Intelligence, 2024.

The information may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. All opinions and commentary are subject to change without notice. SLC Management is not affiliated with, nor endorsing, any third parties mentioned within this article.

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not?constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.

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