Where Do We Go Now?

It was a quiet week, with no surprises, calm markets and to be honest, it was even a little boring when one looks at the headlines. Just kidding! We have a new administration on the way to the White House and what looks to be a clean sweep of Congress as well. That’s right, we are about to about to experience a Donald Trump presidency for the second time.

The Election

Early into Tuesday night, it was already becoming clear that Mr. Trump was outperforming expectations. The state of Virginia, won comfortably by Joe Biden in 2020, was too close to call until later in the evening when Mrs. Harris was eventually declared the winner of the state. In large urban areas, where Democrats tend to outperform, Mr. Trump narrowed the gap all while continuing to comfortably win in rural communities. Late into the evening, when swing states like Georgia and Pennsylvania flipped red, the election was called in favor of Mr. Trump. With him, the Republicans took control of the Senate and are likely to keep control of the House (votes are still being counted and they need just one more seat to claim a majority).

In the end, Vice President Harris had 15 million fewer voters than her predecessor while President-elect Trump, had only 3 million fewer votes than in 2020. The race was not close, and a strong message was sent by the Americans who chose to vote; they were unhappy with the inflation that impacted their quality of life over the last 30 months, they were disappointed with the country’s role in the ongoing conflicts in Ukraine and Gaza and they demanded a shift in the direction of the culture.

The Immediate Response

On Wednesday, the stock market opened with a 1000-point gain on the Dow and more than 300 points on the NASDAQ. Banks, in anticipation of deregulation rallied between 8 to 15%, steel producers jumped double digits in anticipation of tariffs and healthcare providers rallied on the hopes of a more business friendly government. On the other hand, renewables plunged as the Inflation Reduction Act could be amended or entirely repealed (we think the latter is unlikely) and companies sensitive to trade failed to participate in the rally as the unknowns associated with trade weighed on shareholders’ minds. At the moment, investors should be thrilled with the market response to the election outcome, but we should take this enthusiasm with a little bit of caution.

Policy and Market Implications

If we take the President-elect at face value, his administration will implement across the board 10-20% tariffs (and between 60-100% on Chinese imports); this would be a disaster as these tariffs will be paid by the consumer and will be highly inflationary. These tariffs are being floated as a way to increase investment and manufacturing employment in the US but there are two obvious caveats to this vision: the economy is already very close to full employment so I am not sure where these workers will come from and new manufacturing plants will take a few years to get up and running when accounting for the planning, building and production phase, so immediate tariffs will simply punish consumers without any alternatives available.? Further to that, countries can respond to these tariffs by enacting tariffs of their own on the import of American made goods, this is equally problematic. It is possible that this inflammatory language is part of Mr. Trump’s negotiation strategy; we will have to wait and see.

Further tax cuts would worsen an already lax fiscal policy as the fiscal budget deficit is expected to amount to 6.5% of GDP in 2025 with BMO estimating that figure going up to 8% in the face of said tax cuts. While the idea of tax cuts is a net positive for economic growth, there are some forewarnings to this thought process; high-income earners are already net savers and there is a strong chance that what they save in tax cuts will simply be added back into their savings as opposed to being spent on consumption. Also, when one considers that the bottom 50% of income earners were paying an average of 3.3% of federal income taxes, the savings from tax breaks will be nominal and the expected increase in consumption seems very modest. Elon Musk has been (unofficially) tasked with cutting government expenses by $1 trillion or 15% of total expenditures (or 17% when you remove interest expense). It’ll be interesting to see where these cuts come from, but it can potentially impact low-income earners more than whatever they were to gain from tax cuts – again we do not have enough details on this matter yet.

As mentioned previously, the IRA or Chips and Science Act or Infrastructure Act are unlikely to be scrapped entirely but will probably be modified. I do not believe that the incoming administration has an interest in taking a wrecking ball to the economy (which is outperforming every major economy in the world) as much as they just want to make their mark on everything that is already in place. As with how NAFTA was renegotiated without significant change, it is possible these acts will be simply amended to be more streamlined.

What is most glaring is the continued upward movement of yields on the bond market. While the Fed cut interest rates by 25bps yesterday, the market is anticipating that all this stimulatory activity for the economy will be inflationary, prompting future interest rate cut projections to be revised. This is perhaps the biggest risk of Mr. Trump’s economic plan; the economy is finally approaching its 2% inflation target and anything that stimulates demand too quickly will push that inflation figure higher.

Our Strategy

We’re running on speculation right now and we wish to avoid any knee-jerk reaction. What we can take home from this is that a market that is already expensive just got more expensive in anticipation of things that may not happen. When so much future growth is put into today’s pricing, there’s a greater risk of things not living up to those elevated expectations. We prepared for this outcome and in the weeks ahead we will be making adjustments in our portfolios, where it will be a little less growth oriented, contain more financials and healthcare and with a greater shift towards private markets.??

We are available to discuss our outlook in greater detail, but we also believe that we are going to have to revisit our thesis in the months ahead as Mr. Trump’s administration and economic plans begin to take shape. While uncertainty has risen in the face of such an important change, we are not condemned to a worse outcome; as investors it's important that we do not lose sight of this.

Healthy Distraction

I lived out a dream this week by attending David Gilmour’s concert at Madison Square Garden. The show exceeded my expectations, I enjoyed every second of it and I had this feeling of genuine fulfillment having done something that I was not sure I’d ever get the opportunity to do.

Fresh off this feeling, I thought it interesting to encourage our readers to identify the things that they want to see or do in this world; not something vague like travel more or try new foods but something specific. When you dare to dream, you’re taking your first steps towards accomplishing said dream.

Reflect upon the things that having meaning to you and set an objective to live these thoughts out. We discuss this with our clients when we do our financial planning exercises but its equally important to do this in your life planning as well. I know that for a lot of you, marriage and parenthood was that moment, but it certainly does not have to stop there; keep adding to the list of things that bring you joy and seek them out, life seems more fulfilling that way.

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