- Former President Trump was re-elected convincingly, with a majority in both the electoral college and the popular vote
- Immediate market reaction was positive for equities, negative for fixed income
- Looking ahead, we think the second Trump administration should usher in an era of less regulation and lower taxes, both positives for corporate earnings and M&A
- Less benign effects could include a higher budget deficit, higher tariffs, higher inflation, and higher interest rates
- At the margin, these conditions may benefit equities, alts/private equity, real estate, and inflation-protection assets such as TIPS and gold
- Tech equities appear fully valued, and we would focus on less frothy sectors; fixed income still serves as income, but total return picture is less clear
- Overall, we do not recommend tactical trades for clients based on elections, as there are too many variables and uncertainties; we believe clients are best served by sticking to longer term asset allocation decisions which fit their risk appetite
The Election: Trump Wins
After months of uncertainty and an unusual election in which the Democrats replaced their candidate late in the campaign cycle, we have clarity. The next U.S. President is Donald Trump.
In the end, the election was not that close. Trump won both the popular vote and the electoral college.
Equities Take Off, Fixed Income Not So Much
For markets, the immediate reaction is what we call the “mega MAGA” trade: equities rallying sharply, Treasuries selling off, bitcoin and the U.S. dollar rising, oil and emerging markets declining. All of these reactions make sense based on the stated policies of Trump.
His notable campaign platform items include lower taxes (the permanent repeal of already-enacted cuts), less restrictive regulatory burden, higher tariffs (highest on China, but also on other foreign countries), officially embracing crypto currencies, and no commitment to rein in U.S. deficit spending (higher interest rates and higher inflation).
The most pronounced market impact was a massive equity rally after the election. The S&P 500, Nasdaq and Dow all rallied sharply. But the best performer was the Russell 2000 index of small cap equities, based on the view that the Trump administration policies would disproportionately benefit smaller, U.S.-focused companies compared to global mega cap stocks.
We believe that corporate tax rates are likely to be lower in the next Trump administration, which is positive for the earnings power of corporate America. We also note that a lighter touch regulatory climate should benefit several corporate sectors.
Almost every equity sector was higher, led by financials, on hopes for lighter regulatory touch. Industrials, energy, technology and communications were also higher on the first day post-election.
We expect that the environment for M&A could improve post-election, as the FTC under Lina Khan had a track record of attempting to curtail corporate activity deemed uncompetitive, which should be positive for private equity dealmaking. Finally, we note that interest-rate sensitive sectors, such as real estate and utilities, declined slightly on the first day following the election, probably a reaction to the possibility of higher interest rates.
Lower Taxes + Higher Tariffs = Higher Debt
We note that the sum of Trump’s proposed tax breaks total more than $10 trillion over ten years.
Trump’s proposals include making the 2017 tax cuts permanent, cutting corporate tax rate, excluding tips and Social Security payments from taxes, and increasing the child tax credit. In order to offset the impact of lower taxes, Trump has proposed raising tariffs on goods from China, as well as additional tariffs on imports from other countries.
The Petersen Institute estimates that the tariffs could bring a cumulative $2.75 trillion in revenue over the next 10 years.
As a reminder, the U.S. has enacted various tariffs in the past—for example, the McKinley tariff of 1890 and the Smoot-Hawley Tariff Act in 1930. The latter case was viewed as a potential factor in deepening the Great Depression. In our view, despite the goal to protect American industry using tariffs, the end-result is often higher priced goods and lower aggregate demand. The higher prices for imported goods could also lead to stickier inflation. Core PCE remains above the Fed’s 2.0% target, and the imposition of broad-based tariffs could make it even harder to return to this goal. We note that after imposing tariffs several times in the past, the U.S. stepped back from tariffs and embraced free trade policy for most of its recent history.
Although we remain skeptical that a broad-based tariff regime would be positive for the U.S. economy, we also acknowledge that President Trump has a history of pragmatism and “making deals,” despite his protectionist rhetoric. Therefore, we are hopeful that the ultimate outcome of his proposed tariffs could be much less. If that is the case, however, then we also expect that the revenue raised from the tariffs could be lower, with even more deficit spending as a result.
U.S. Budget Deficit Is High
Even before the proposed massive tax cuts, the U.S. budget deficit is already at a very high ~6%, and expected to continue for the foreseeable future.
The budget deficit has rarely been this high except in cases of recession, and the fact that this level of deficit is occurring during solid economic growth is a concern. We also note that the U.S. budget deficit compares unfavorably to peers.
We further note that the projected budget deficit was estimated before the proposed Trump tax cuts are factored in.
Meanwhile, the U.S. debt burden is close to 100% of GDP and climbing. According to the Congressional Budget Office, it is forecast to rise above 122% by 2034. In our view, the U.S. will likely continue issuing more U.S. Treasuries as a result of this increasing debt burden. All else equal, higher supply of Treasuries is likely to lead to higher yields in order to attract buyers.
Summary Quick Takes for Investing During Trump 2.0
Given this backdrop, we expect interest rates and inflation could be higher at the margin under the Trump administration.
In that environment, real assets such as real estate and infrastructure, along with stores of wealth such as gold could be better positioned. We recently increased our allocation to real estate, independent of the election, based on our view that real estate should benefit from a stronger economy and our sense that valuations are bottoming after recent declines. We maintain this view following the election.
We are now more cautious on the long-end for fixed income, given that Treasury issuance is likely to be elevated for the foreseeable future. As a result, we are considering taking our recommendation on investment grade debt to underweight from neutral. However, with the immediate adjustment in yields that we have experienced, we believe that fixed income remains attractive for income going forward, even if though total return could be muted.
As for equities, we note that we have had two very strong years after a tough market in 2022. Valuations on the S&P are higher than the long-term average, particularly among tech equities, while concentration remains elevated. Given this, we retain our recommendation for a slight overweight on value equity, with an underweight to large cap growth. Finally, we are increasingly constructive on alts, especially in private equity and secondaries given the expectation for a more favorable M&A environment in the next administration.
Invest for the Long-Term, Not Politics
Our summary quick takes above are simply that: our initial views following the election. We emphasize that many of President Trump’s proposed policies will need Congressional support in order to be adopted. While the Senate has flipped Republican, control of the House is unclear as of this writing. We expect that some of the most aggressive Trump proposals will ultimately get watered down when implemented. With that in mind, for the time being, we are maintaining our current asset allocation recommendations post-election as we monitor longer-term impacts.
Importantly, we do not recommend tactical trades for clients based on elections, as there are too many variables and uncertainties about the final policy outcome. Rather, we believe clients are best served by sticking to longer-term asset allocation decisions which fit their risk appetite.
We will continue to update our investment views based on our assessment of fundamental valuations and long-term drivers, rather than instantaneous market reactions. As always, we encourage you to speak with your investment representative for advice on the best investment strategy for you and your goals.
Definitions, sources, and disclaimers
This content is being published by Amerant Investments, Inc (Amerant Investments), a dually registered broker-dealer and investment adviser registered with the Securities and Exchange Commission (SEC) and member of FINRA/SIPC. Registration does not imply a certain level of skill, endorsement, or approval. Amerant Investments is an affiliate of Amerant Bank.
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor
Additional Risks:
- Past performance is no guarantee of future returns.
- There is no assurance the Fund will pay distributions in any particular amount, if at all. Any distributions the Fund makes will be at the discretion of the Fund’s Board of Trustees
- There can be no assurance that any Fund or investment will achieve it objectives or avoid substantial losses. Actual results may vary
- The value of the investments varies and therefore the amount received at the time of sale might be higher or lower than was originally invested. Actual returns might be better or worse than the ones shown in this informative material.
- Limited liquidity: Investors should not expect to be able to sell shares regardless of how the Fund performs. Investors should consider that they may not have access to the money they invest for an extended period of time.
- Volatile markets: Because an investor may be unable to sell its shares, an investor will be unable to reduce its exposure in any market downturn
- Funds may invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be illiquid and difficult to value
Please review the prospectus or related materials for further details regarding risks and other important information. For additional disclosures and other information regarding AMTI including our customer relationship summary, please visit: https://www.amerantbank.com/personal/investing/
Related posts
