November Wrap Up - What's in Donald's sleigh?

The United States got a new government for Christmas. Markets greeted the election result with enthusiasm. The US S&P 500 share market index rose to a record high, up 5.7% for the month. It has been quite the year for shares, the S&P 500 is up 26.5% for the year to 30 November 2024. Remarkable. Will the new Trump government herald better things to come? In this note we dig into the new government's possible policy agenda and ponder what that might mean for the global economy and markets. It's complicated. Higher economic growth, more investment and higher inflation seem likely. This is a decent environment for growth assets but comes with risks.

The United States will have a new government in January 2025. History suggests that changes of government, while generating a lot of interest, tend not to be the market moving events that many of us might expect. Ultimately it is long run economic growth that drives growth assets higher and sets interest rates.  This plays out over longer than one presidential cycle.

Donald Trump's second presidency feels like it could be different. While we don't know exactly how his legislative agenda will pan out there are some key themes that are evident - a more isolated, inward focussed United States, increased government deregulation and increased government spending all seem to be core planks of the new administration. Each one has the potential to impact market pricing. 

Government spending likely to balloon - it seems likely that the new administration will continue to run significant budget deficits with some forecasters expecting further fiscal expansion. This will likely come in the form of tax cuts that were due to expire being extended and potentially increased, lower corporate taxes and tax reductions on social security. All up this could extend the fiscal deficit by up to US$4t, according to JPM Asset Management. Higher government deficits typically mean higher interest rates and the risk of inflation. 

Tariffs on imported goods - President Trump has been consistent in a desire to bring more manufacturing back to the United States. One of the key weapons in doing this are tariffs. The initial pre-election proposal was to impose a 10% across-the-board tariff on America's trading partners with a 60% tariff levied on Chinese imports. Since the election various additional tariff proposals have got airtime including on Mexican and Canadian imports and the threat of tariffs on BRIC countries should they try to leave the US dollar bloc. The economic theory of tariffs is clear, tariffs mean higher prices for consumers in the country imposing the tariffs. While this is a one off increase in prices and not outright inflationary, inflation is an ongoing constant lift in prices, it is likely to be painful for US consumers. 

Immigration - along with tariffs a Trump government has been strident in its desire to deport illegal residents in the United States. The size of the program isn't clear but comments from officials point to the possibility that millions of people are deported. Many of these people have jobs in the US now. A large-scale reduction in the size of the US labour force would, all other things being equal, have a negative impact on potential economic growth (the size of the work force is a key determinant of how much an economy can produce). It is also likely to add to inflation given that fewer workers mean more competition for employers to find staff resulting in upward wage pressure. 

Deregulation - the big hope for markets is DOGE, the proposed Department of Government Efficiency, to be headed up by Elon Musk and Vivek Ramaswamy.  Reducing inefficient government spend would offset some of the fiscal expansion likely from a President Trump government and ensure that spend is allocated in areas of maximum economic efficiency. Reducing regulation and red tape would enable businesses to growth more rapidly and capital to be allocated in the right areas. It is a noble idea. The scale of the opportunity to do this and the ability of the department to deliver on the goal will be seen over time, but should it be successful it would boost economic growth and act to reduce inflation. 

While it is only time that will enable us to know exactly what policy gets enacted there is enough in the general tenor of comments that have been made to form a view of the likely opportunities and risks the Trump government will present. 

Our investment partners BlackRock summarise it well. "We think energy, financial and tech sectors can benefit, partly from deregulation. We see multiple factors, including supply constraints like an aging workforce, keeping inflation above pre-pandemic levels. Higher-for-longer inflation and policy rates could eventually challenge risk sentiment. We expect yields to rise over time as investors seek more compensation for the risk of holding bonds." In terms of the share market they note "In the near term, we see U.S. equities supported by solid economic and corporate earnings growth, political clarity and Federal Reserve rate cuts. Longer term, much depends on how much of Trump's agenda is enacted."

2025 is going to be an interesting year for investors. There will be plenty of opportunities presented but the risks are also mounting. It will be a year for vigilance, common sense and being cautious not to overreach and take on too much risk. 

Thank you for your support in 2024. Have a great Christmas and a restful New Year's break with your family. 2025 will be interesting for investors, we will need our energy and focus! We will be back with our commentaries in early January.

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