The election results are in: how will that impact your investments?
It’s natural for humans to struggle with uncertainty. Our desire, at the root of our being, is to try and overcome obstacles before they even happen to us. This is something instilled generation after generation and has been deeply ingrained in our psyche for thousands of years.
As of this writing, there is still no credible product on the market that allows us to see the future. After last week’s election and the best post-election day rally in the history of the S&P 500 and the Russell 2000®, numerous questions have come our way from clients trying to understand what a Trump presidency (and, more importantly, a Republican mandate controlling both the Senate and House as well) would look like.
To help our clients parse through relevant information and create an understanding of a series of outcomes and how that can potentially affect your financial plan and investment portfolio. At times of uncertainty and change, it usually makes sense to go back to fundamentals.
Several things are well-known regarding the stock and bond markets, as well as inflation and the economy. What we knew before the election was that inflation had come under control and was trending down toward the Federal Reserve’s target rate of 2%, stock market valuations were very high, and bond yields were looking attractive. The economy was operating in “Goldilocks” mode as we headed toward November: lower inflation, high employment that was steadily growing (although at a much slower pace) along with growing economic output, and interest rates starting to come down.
With the sweeping changes in DC, the short-term outlook is bound to shift. How does this affect your financial plan and long-term goals? As frustrating as it may seem, the impact is likely minimal. Long-term returns on asset classes should remain stable, and while the global stock market may not experience immediate effects, it's evident that the changes will be profound. The outlook for various asset classes and individual companies will likely fluctuate in the interim. As good Boy Scouts know, we must be prepared and consider how the next four years may require adjustments to our strategy.
We’ll explain how Noble Wealth Partners is approaching the following areas and give you a summary of The Good, The Bad, and The Ugly for each. The chart below is your TLDR, but you can jump into more detail on any of the topics you like below.
| The Good | The Bad | The Ugly | |
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| Economy, Taxes, and Tariffs |
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| U.S. Stock Market |
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| Bond Market and Interest Rates |
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| International Stocks and Dollar |
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| Housing |
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The Economy, Taxes, and Tariffs
THE GOOD
There is no doubt the Trump administration will be very pro-growth and attempt to remove a lot of regulatory red tape for American businesses. They have been very transparent about this. We would also expect the TCJA (Trump’s massive tax law overhaul from 2017) to be extended and corporate tax rates reduced even more - Trump himself advocating for a 15% flat corporate tax rate. All of this will be a tailwind for American consumers and businesses alike. Reducing the corporate tax rate should have an immediate impact on earnings and the stock market.
THE BAD
Tariffs, universally, are disliked by both economists and business leaders. President Trump refers to himself as a “Tariff Man” and intends to utilize the tool to negotiate with foreign countries and punish the ones he doesn’t like. Functionally, a tariff is a tax placed on a company attempting to import goods into the United States from another country. For example, when President Trump says he intends to charge China a 60% tariff on their goods, it’s important to note that China is not paying that additional tax. If China manufactures a bike that Walmart intends to import for sale, it’s Walmart that pays that tariff to import the bicycle. Walmart’s leaders, of course, don’t simply intend to pay that fee and make less money. No, they will charge more to sell that bike to the American consumer. In the end, the blunt force of tariffs is almost always borne by the consumer. If tariffs are applied on all imported products, Americans will see a substantial increase in prices on most items, increasing inflation broadly.
Side note: It is not correct that Trump has unchecked powers to levy tariffs. What is correct is that once his administration meets a burden of proof to “green light” tariffs against a country, he then has broad and unchecked powers. So, with China, he does have broad powers. With other countries, especially trade partners with whom we have a legal treaty (Mexico and others), he does not have broad powers. Nonetheless, clearly, there will be increased trade volatility, and looking past the fiction for fact will be difficult. As a result, it’s reasonable to expect trade-related volatility going forward.
THE UGLY
Correct or not (we’ll all find out together), the market views Republican control of Washington as negative for the debt and deficits. As a result, Treasury yields will rise on this news (the 10-year Treasury yield is up 17 bps this morning) and continue to be elevated until such time as Republicans calm fears of rising debt, deficits, and trade wars. Trump’s economic plan was vetted by The Committee for a Responsible Federal Budget along with Harris’s. Trump’s had a median expectation to increase debt in the 10-year window of 2026-2035 by $7.8 trillion, and as much as $16 trillion (and getting close to 150% of GDP). The Federal Budget has two inputs in this regard: the amount of money we spend vs. the amount we collect in taxes. While Trump’s tax package will be stimulative for the economy, the committee believes it will result in much lower tax receipts that won’t be offset by a reduction in government expenditures. It remains to be seen if the newly organized Department of Government Efficiency, headed by Elon Musk and Vivek Ramaswamy, will have the teeth to truly have an impact on reducing wasteful spending. (We would be remiss if we didn’t share a slightly different point of view from an economist that we really like here: Cullen Roche argues why Trump’s next term could result in deflation and lower rates)
While it is up for debate what impact a continuously expanding national debt and ongoing budget deficits will have, economists agree that higher inflationary pressures and higher interest rates will become the norm in this scenario.
The U.S. Stock Market
THE GOOD
President Trump’s agenda is all about removing obstacles for American businesses. Lower tax rates and less regulation are welcome news for all business owners and consumers. The VIX, or the measure of market volatility, has plummeted since the election from above 20 down to 14. This implies that market participants are much less worried about the future…and it’s full steam ahead. Not all sectors of the U.S. stock market will benefit from the Trump agenda, and the most likely winners (on a relative basis) under this scenario would be large industrial companies, the defense industry, energy and basic materials producers, and banks/financial/insurance companies. Value-oriented stocks could outperform growth stocks. Trump’s agenda is very focused on the domestic side vs. overseas, and that should benefit smaller companies that rely heavily on local revenues the most. We believe that small and mid-size companies will see outperformance in the early stages of this new regime in DC.
THE BAD
But which U.S. stocks will benefit the most? Larger, multi-national companies derive a lot of revenue from overseas. Semiconductor companies generate over 3/4 of their revenue outside the United States. Trump’s agenda is not one of globalization - it is a pro-growth, domestic agenda that will increase dollar strength. That is not a good recipe for companies doing business overseas.
As mentioned above, the Magnificent Seven (Mag7) stocks are not likely to continue to lead the way for the stock market. Large tech is by no means going away, but the headwinds will be a bit more blustery for firms like Alphabet (Google), Apple, Meta, Nvidia, and the like. Trump has paid some lip service to wanting to keep America as the leader in the development of AI technologies (artificial intelligence) as the nascent industry continues to mature, which should help, but a lot of these companies rely heavily on revenue generated overseas. To be clear, however, through the end of the year, we would anticipate all stocks continuing to rally.
Higher interest rates and inflation will likely be the uncomfortable companion to Trump’s agenda. Higher interest rates hurt smaller companies much more than large companies as they have a difficult time borrowing at preferential terms. Small company stocks that don’t have their house in order will struggle.
Following Robert Kennedy Jr.'s appointment as Health Secretary, pharmaceutical companies have faced significant challenges. Kennedy is a well-known anti-vaccine advocate, and promoting this viewpoint to the American public is likely to decrease vaccine manufacturers' revenues.
THE UGLY
It’s not necessarily ugly, per se, but market leadership will be shifting under a Trump administration and Republican control of both the House and Senate. We would anticipate the rest of the market outside the Mag7 to catch up to some of the incredibly high valuations of the large, growth tech companies, and the rally to broaden outside the concentration at the top of the heap. The biggest concern here is a continued overheating of all U.S. stocks. Following the election, the CAPE ratio (cyclically adjusted price to earnings ratio), which is a broad measure of the overall valuation of the market, increased to ~38. By comparison, that is as expensive as we’ve seen the market since 2000 right before the internet bubble burst (when the CAPE was at 44). Historically speaking, this stock market is entering bubble territory and there isn’t a lot of room for error by the leaders of corporate America. Irresistible force, meet large immovable object.
The worst-case scenario for the American economy is always recession. Recessions are nasty, and many have forgotten how insidious they can be and how difficult they are to recover from. America has not seen a true recession (not counting the pandemic recession of 2020) since the Great Financial Crisis of 2008-09. Small company stocks, generally speaking, will underperform mightily in a recessionary environment, while they tend to recover the quickest following a recession. At this point, there is nothing that necessarily points to a recession on the horizon other than a slightly softening job market, but it’s always better to be prepared.
The Bond Market and Interest Rates
THE GOOD
There isn’t a lot of good, to be honest. One of the more ironclad rules in finance (and there aren’t many) is that the best predictor of your future bond returns is the starting yield. The bond market, from both government and corporate issuers, has very attractive starting yields for the first time in a long time today. For retirees, you can lock in a risk-free rate of return of ~4.5% for the next ten years from the U.S. treasury, and that is something to be positive about.
THE BAD
The bond market is in the midst of its most cataclysmic performance of all time. Currently, we have been in a drawdown for bonds (decline from peak to trough) for the past 51 months. That has NEVER occurred before, and the longest drawdown prior to this one lasted 16 months starting in October of 1980. Bonds are meant to provide our portfolios with a hedge against stock market volatility, but 2022 was the first year in the last 100 years where both stocks and bonds had double-digit negative returns. What happens from here, then? As we’ve mentioned throughout this piece, we would anticipate interest rates to remain elevated and likely move up under a Trump administration, and that would mean additional volatility in the bond market and underperformance relative to other assets.
THE UGLY
Losing control of inflation again would be an absolute nightmare for the bond market. While the rate of inflation has been trending down toward the Fed’s desired number of 2% for a couple of years now, it has started to firm up in the last couple of months. If inflation spikes higher, a response from the Fed similar to what happened in 2022 would be necessary and that would be a bloodbath for the bond market (and not great for the stock market, either).
International Stocks and the Dollar
THE GOOD
Similar to bonds, it’s hard to find a lot of positives for international stocks at this point. The best we can come up with is that they have underperformed the U.S. stock market for so long, that their relative valuations look very attractive when you compare them to their very expensive counterparts domestically. Will international stocks reverse this ugly trend in the next few years? It’s hard to find the catalyst, but investors don’t always need a catalyst to help assets revert to the mean.
THE BAD
Trump’s agenda is not a positive for any of our trading partners, and international companies absolutely covet the American consumer. Tariffs will make doing business for international companies in America harder. President Trump has also made a strong dollar a priority, and a strong U.S. dollar vs. other currencies makes for an additional headwind against outperformance for international stocks.
THE UGLY
A stronger U.S. dollar has an even larger impact on smaller, emerging economies that are forced to borrow money in dollars rather than their local currencies. While this comment doesn’t necessarily relate to the stock market, a strong U.S. dollar has many negative impacts on countries around the world and affects the ability of their governments to finance their operations. That could result in significant volatility for emerging markets.
Paradoxically, Trump has also pushed for deregulation and broad acceptance of Bitcoin and other cryptocurrencies. While this has created significant gains for those holding cryptocurrencies, including Trump, it presents a significant risk not only to the dollar but also to the nation's prosperity. The reason is simple: as a country, we are able to run fiscal deficits and borrow at incredibly low rates because the dollar is the reserve currency of the world. As long as investors and other countries are willing to finance our deficits and hold dollars—because they, too, want to hold the global reserve currency—we don't run into any issues. However, if the dollar is no longer the reserve currency of the world, whether that results from another currency like the euro or the Chinese renminbi taking our place, or even possibly Bitcoin, we would have a significant problem on our hands.
Investors would then require a market interest rate on our debt, and we would no longer have the tailwinds of being considered a safe currency. This means we would have to pay a fair interest rate on our debt. Spoiler alert: that fair interest rate is significantly higher than the roughly 4.5% we're paying on the 10-year Treasury bond right now. As interest rates rise, the cost of servicing our debt increases, which crowds out other forms of discretionary spending. We may then have to either default on our debt or live through a period of austerity to recover. The implications are significant, and pushing to have the dollar replaced is not something U.S. leaders should be advocating for.
Housing
THE GOOD
While not discussed explicitly in any of Trump’s messaging like it was with Harris’s campaign, the general assumption is that the former real estate mogul just loves to build. The majority of Trump’s policies, however, are aimed at the demand side of the housing equation, like providing tax breaks for first-time home buyers. The housing market doesn’t need to stimulate demand; the United States is in desperate need of an additional supply of housing. One would have to assume that the Trump administration understands this, as the majority of the states that have actually seen increases in housing supply (like Texas, North Carolina, and Arizona) are considered red states, while California sits idly by doing nothing to address their grave housing problem.
THE BAD
Purchasing a home is incredibly expensive, exacerbated by the problem that the 30-year mortgage rate has spiked from below 3% to peaking at almost 8% within the last three years (currently settling in around 6.75% as of this writing). Lower interest rates would make this “less” of a problem, but it wouldn’t help ease the actual issue (supply, mentioned above). Regardless, any hopes of lower interest rates would require inflation to be held in check, and that isn’t looking great at this point.
THE UGLY
America can’t afford to lose an entire generation (the Millennials/Gen Y) entering adulthood with limited opportunities for household formation. The ugliest situation for housing would be to continue doing what we’re doing today, which is not building enough to meet demand. America has vastly failed to accommodate housing demand since the Great Financial Crisis, and that needs to end soon.
Conclusion
Buy the election, sell the inauguration. This likely signals a solid year-end rally, provided that growth and the Federal Reserve perform as expected. The market will probably respond favorably to this outcome as the year ends, shifting focus back to the Fed—specifically, the possibility of continued rate cuts—and stable growth. Similar to 2016, markets are likely to overlook some of Trump’s comments. Therefore, we shouldn't expect trade volatility or fiscal concerns to significantly impact the markets until 2025. However, it’s reasonable to prepare for more market volatility in 2025 than we will experience in 2024.
