Digesting the Election, Markets, and the Next Four Years

November 5^th marked one of the most pivotal elections in recent memory. Donald J. Trump’s victory validated some, antagonized others, and left many puzzled about the next four years. These are the consequences of a fierce campaign cycle that featured lofty promises from both candidates.

Investors are now tasked with a nearly impossible question: What lies ahead?

The stock market stood flat in October as investors awaited the election. November then returned a whopping 5% thanks to a strong post-election rally. Some attribute this rally to Trump’s victory. Others feel the rally had more to do with the election’s conclusion than the result itself. As my October article noted, the stock market tends to rise over time regardless of which party holds office.

The Presidency is one of countless factors impacting markets, albeit an increasingly important one. Markets finished relatively flat in December following a pre-Christmas slide. The slide is largely attributed to concerns around interest rates, inflation, and trade policy in the new regime. The road ahead remains to be seen, but there is reason to believe uncertainty could persist.

While the future is impossible to predict, it can be useful to assess the information available today. Following are analysis of five key areas likely to impact American pocketbooks and investment accounts in the coming years.

Trade Policy

Among the most widely discussed topics is trade policy. Donald Trump campaigned on an American-first platform that put tariffs front-and-center. Mr. Trump has discussed plans that would impose 25-percent tariffs on Canada and Mexico, and a 10-percent tariff on China. His supporters argue the tariffs will improve the United States’ bargaining power, promote American manufacturing, and rebalance our country’s longstanding trade deficit with the international community.

Economists are circumspect. Many argue the tariffs could damage the economy by making goods more expensive. Others suggest the case for tariffs is much more nuanced. In this contrarian view, tariffs are a tool to pressure foreign nations into negotiating more favorable trade agreements and encourage companies to onshore manufacturing activities.

Alan Wolff of the Peterson Institute for International Economics put it best: “…given in moderation and for the right purpose, [tariffs] can help heal. Given in excess, they become a poison.”^[1]

Unfortunately, there are no clinical trials in economics.

Nevertheless, American consumers and businesses can expect higher prices under the proposed tariffs. This could further result in elevated borrowing rates, and slower economic growth more broadly.

Interest Rates & Monetary Policy

Interest rates are equally relevant. The Federal Reserve roiled markets on December 18^th when Jerome Powell suggested the Fed might pause rate cuts. Powell cited persistent inflation as the primary reason.

The Fed’s reasoning might be measured, but the market reaction was monumental. Investors became concerned that interest rates will remain elevated for longer. This marks a significant contrast from market sentiment earlier this year, when stock and bond markets eagerly priced in extensive rate cuts throughout 2024.

Trump’s expected influence on the Federal Reserve is an open question. In theory, the Federal Reserve is an independent body free of political meddling. In practice, it has direct and indirect ties to the broader political landscape. The Fed’s leadership, including the chairperson, is appointed by the President and confirmed by the Senate. The body also reports regularly to Congress and the American public.

Trump pondered replacing Jerome Powell before the Chairman’s term ends in May 2026. He later downplayed the idea after experts highlighted significant legal hurdles. Nevertheless, the Federal Reserve’s independence will be tested by Trump’s unconventional pressure tactics. Investors can expect Trump to promote lower interest rates and vie for greater authority over monetary policy. His success will depend upon the amenability of the Federal Reserve and, if needed, the courts.

Taxes

Tax policy is the one area that directly affects American pocketbooks. It was also central to Trump’s reelection campaign.

Trump promised to safeguard the Tax Cuts and Jobs Act of 2017 (TCJA). The landmark bill reduced personal income taxes, raised the estate tax exemption, and increased the child tax credit for millions of families. The law is largely set to expire at the end of 2025 absent Congressional action. Trump and many Republican allies will push Congress to extend the law and/or make certain key provisions permanent.

Trump also wishes to build upon the TCJA by eliminating taxes on tips and Social Security benefits. Any such measure would increase take-home income for millions of Americans, bolstering their disposable incomes and buying power. The potential short-term benefits are encouraging. The long-term economic implications, however, are less inspiring.

America’s deficit problem is widely acknowledged but rarely addressed. Any additional tax cuts risk exacerbating the country’s ballooning deficit. This carries severe long-term economic consequences and certain reputational risks. Nevertheless, there is little evidence that either party has the appetite to tackle the deficit directly.

Spending & Fiscal Policy

The current debt ceiling negotiations highlight deep divisions in our government. They also reveal bleak prospects for bipartisanship over the next four years.

The debate revolves around whether to raise the government’s debt ceiling – a critical step in funding the government’s obligations. Once a routine process, debt ceiling negotiations have become extremely contentious in recent years. These events require concessions and compromise from an increasingly fractious governing body. In many ways, the debate resembles a high-stakes playoff game involving enemy opponents. One side pushes to defend the status quo, while others attempt to score big with new spending programs or cuts.

But the consequences are far from trivial. Unlike a playoff game, the winners and losers are not the opponents. They are the American people, many of whom rely on government funded programs for income, protection, and care. Failure to pass the debt ceiling jeopardizes these programs and America’s financial reputation across the globe.

The debt debate illustrates Congress’ inability to reach consensus. It also might explain Trump’s approach to spending. Trump tasked the newly formed Department of Government Efficiency (“DOGE”) with reducing government spending and eliminating waste. Early priorities focus on reducing the number of federal agencies and slashing the government workforce. This approach reflects a political reality plaguing policymakers for decades: spending cuts are never popular among voters. Trump might avoid direct voter backlash by targeting the bureaucracy rather than its individual programs.

Time will test the extent of Trump’s spending cuts. Trump’s proposed cuts to Supplemental Nutrition Assistance Program (SNAP), Medicaid, the Department of Education, and other popular programs are likely to encounter opposition. Meanwhile, any further tax cuts will draw the scrutiny of deficit hawks in Congress. Trump will need to tow a fine balance if he wishes to accomplish both.

Student Loans

Biden made waves when he announced the Saving on Valuable Education plan (SAVE). His initiative sought to forgive more than $175 billion in student loans. The plan stalled amid a flurry of lawsuits claiming Biden exceeded his executive authority. Trump is not expected to continue defending the plan in court.

Student loan debt will haunt American pocketbooks for the decades to come. Studies show that student loan debt is linked to reduced consumer activity and diminished retirement savings.^[2] Few expect the student debt crisis – or its root causes – to be addressed by the next administration.

Looking Ahead

Mr. Trump’s next term will have an impact on spending habits, markets, and the economy more broadly. However, the exact implications are merely a guessing game at this point.

Prudence lies in the proactive. Individuals are wise to seek out personalized tax and investment guidance ahead of the regime change in an increasingly puzzling world.