Post-Election Analysis: What Trump’s Economic Policies Mean for Investors

By Scott Welch, CIMA®, Chief Investment Officer & Partner

As we expected, this was a tumultuous election cycle, but the results are clear.

Donald Trump won a resounding electoral and (seemingly) popular vote victory. The Republicans will retake control of the Senate and retain a thin majority in the House.

So, the GOP will control the executive branch and both chambers of the legislature. This doesn’t happen very often – Americans seem to prefer a split government, but here we are.

While this represents an invitation for the Republicans to pursue their agenda, in our view it does not represent a “red wave” election.

First, while the GOP retook control of the Senate, it does not have a filibuster-proof majority of sixty seats. The Democrats will do what they can to stop legislation they disagree with, and the GOP may have to compromise on a variety of issues to get past the filibuster.

Likewise, given their thin majority in the House, the GOP will have to keep almost all its members “on board” on most legislative issues or else work with the Democrats to get legislation passed.

In today’s partisan and divisive political environment, all of this is much easier said than done.

That said, what economic policies might investors expect to come out of Washington, DC over the next two to four years? How might these changes affect the investment markets and recommended portfolio allocations? 

Let’s dive in.

What Trump’s Policies Mean for the Markets

• Tariffs: One thing we know about Donald Trump is that he loves tariffs, and he has loudly promised to enact them as soon as he takes office. He will have broad (but not absolute) authority to implement them without legislative approval. And so, he will.

• Taxes: Here, Trump’s campaign promises are pro-growth. He wants to maintain the tax cuts implemented in his first term and attempt further reductions at both the corporate- and individual- level going forward. If he is successful and gets the legislature to work with him, this will be pro-growth and pro-consumption and will be a net benefit to the economy and the investment markets. 

• Regulation: Trump’s proposed regulations will be another net positive for the economy and the markets, specifically in the energy production sector. Whether or not Elon Musk and Vivek Ramaswamy are successful in reducing the size of the government and making it more efficient (again, easier said than done), they have been given the mandate to try, and we can expect a lower regulatory burden and corresponding economic drag from the incoming administration than we experienced with the current one. A less burdensome regulatory environment will be pro-growth and pro-markets.

• Judicial: Trump and the GOP will once again be able to appoint or nominate conservative judges at all levels of the judiciary. We can expect less “legislation from the bench” and therefore more certainty for companies to make investment and planning decisions. Since the markets hate uncertainty more than anything, a more “constructionist” judicial landscape should be positive for economic growth and the markets.

• Inflation: Trump has been transparent about his desire for easier monetary policy. His focus is growth, period. Accordingly, he will fight with the Fed, specifically Fed Chair Jerome Powell, once he takes office.

However, we do not believe, as some have speculated, that Trump will fire Powell prior to the end of his term in 2026. What we can expect, however, is that Trump will nominate someone to replace Powell who is more inclined to be a Fed “dove” than a “hawk”.

In our opinion, it is imperative that the Fed retain its independence, and one of its mandates is to bring inflation to a manageable level. If Trump’s policy agenda – tariffs, regulatory relief, lower taxes, etc. – are successful, the US should experience very solid economic growth – as well as rising inflationary pressures. In other words, the Fed will have its hands full for the next four years.

• Foreign Policy: Trump is adamantly “America First” in his foreign policy worldview. At the same time, he is unpredictable and countries that do not like the US will accordingly be more cautious in dealing with the US.

The world’s geopolitical situation right now is as tenuous and as dangerous as at any time in the past 25-30 years. Trump cannot solve all the issues currently in play, but we can expect other countries to pay more attention to what the US says and does than they did under the current administration.

Despite Trump’s non-interventionist nature, the US remains a military superpower, and we believe we will remain embroiled in more of the world’s affairs than Trump might otherwise choose. After 75+ years of acting as the “world’s policeman”, the void left behind if we simply stepped back would be catastrophic to US international interests.

Nature hates a void, and other countries will attempt to step in if they see the opportunity to do so.

What the Markets Aren’t Pricing In

Much of the above analysis represents the consensus market view, and therefore we can assume it has already been priced into the market.

Most of the largest “wirehouse” firms (Goldman Sachs, Morgan Stanley, etc.) are broadly bullish for 2025. While acknowledging that the current market is somewhat expensive, especially the mega-cap tech stocks, the consensus view is that the Trump stated policy agenda will be pro-growth and pro-market – but also inflationary.

So, what are some things that the market is paying less attention to?

1. Geopolitical shocks: The market is aware of the current geopolitical unrest in  Ukraine, Russia, Israel, Iran, China and so forth. But it seems to be placing very low probabilities to disruptive events despite heightened risks (like , for example, Russia just announcing that it has “lowered the bar” for the use of nuclear weapons if Ukraine continues to use US weapons to launch attacks into Russian territory).

2.  Runaway inflation: Trump’s pro-growth tax and regulatory agenda, combined with his (in our opinion) unproductive tariff agenda, creates an environment where we might witness a dramatic increase in inflation. We believe that wages will not keep up if this happens, and US consumers may rebel. This may force the Fed to halt its rate cut regime and even reverse course.

3.  Recession risks: This represents the opposite side of the same coin as inflation. Trump’s tariff policy, which would almost certainly be reciprocated by other countries, would dramatically slow down economic expansion while raising prices. The market would not react well to this scenario, introducing stagflation risks.

4.  Ballooning deficit: Both parties in the US (reflecting the indifference of their constituents) pay no attention to our rising debt and deficit. But ultimately this will have a negative economic effect. The Treasury will be forced to issue more and more debt, which could drive interest rates up and potentially “crowd out” private investment.

We acknowledge these are “outlier” risks – the market is assigning a low probability to them for appropriate reasons. We simply identify them, so investors are not taken by surprise if they bubble up over the next two to four years.

The Economic and Market Impact

If Trump is successful in implementing his policy agenda, we can expect to see increased economic growth, higher inflation and a generally positive market environment.

• US Equities: It is important to remember that the current public markets are, in our opinion, “priced for perfection.” That is, there are no “screaming buys” available.

But we are already seeing the positive impact on small and mid-cap stocks in the US, as investors recognize the valuation dispersion versus large cap stocks and anticipate a more benign economic and regulatory environment that should benefit smaller companies.

We have suggested investors begin to consider reallocating to smaller cap stocks within the US, and we maintain that view.

• Interest Rates: Likewise, recent economic data has thrown into doubt the ability of the Fed to maintain an aggressive rate cut regime (a doubt subtly echoed by Chairman Powell in his most recent public remarks).

The market is still pricing in a 25-bps cut at the December FOMC meeting, but the probability is getting lower, and the market is then pricing in a “pause” in further rate cuts over the course of 2025.

If this “slowing down” of rate cuts occurs (and we believe it will), then the dollar should maintain or even increase its current strength, making non-US investments less attractive.

We believe in global diversification at the portfolio level, but we believe being overweight the US right now is an appropriate course of action.

• Private Markets: Finally, a lower tax and regulatory environment should be positive for the private markets, both equity and credit, and we continue to actively allocate to that space.

We are especially interested in sports investing and in energy production and transmission. The demand for energy resulting from the “AI” evolution is, in our opinion, an attractive investment opportunity, especially with an incoming administration that is pro-energy.

We hope you find this analysis useful. As always, please do not hesitate to contact us with any questions.