As we discussed in a recent Insights piece,” it is not our job to wax poetic about how people should spend their money. It is also not our job to tell people what to value or how to think about the systems and people that govern us. Offline, or in a setting that isn’t a biweekly newsletter sent to thousands of people, is where we can have more in-depth philosophical and political conversations with people with whom that level of trust, openness, and engagement is appropriate, welcome, and understood.
What we can comment on, and frankly what you can rest assured we have been debating for months, and with more knowledge since the election, is what the impacts could be, economically, fiscally, financially—of this election cycle, and where the opportunities and risks exist. This is not a comment on the impact you may feel on your home, your family, or your community, good or bad; this is a comment on how we can continue to be good stewards of the capital you’ve entrusted us with. As investment managers, our actions are more informed by questions about the future than answers about the future. That is why we love what we do—because the markets are challenging and not for the faint of heart, the landscape is ever evolving, and because on almost any market outlook topic, you can find very smart people who hold very opposing views on what they believe is the most likely outcome. It’s rough out there, but we accept and embrace the challenge.
As an overwhelming spoiler alert, we’d urge (beg) you to consider that over the long-term, as we’ve commented on several times this year and in election years past, the impact of one party versus the other on the trajectory of the stock market is spotty at best. Mostly, it can be easily concluded that things other than politics matter more. What do I mean? There’s no real pattern or correlation between one party and stock market growth. Regardless of who holds the presidency, the stock market’s long-term trend has been upward and to the right. Just consider it from a logical perspective: the idea that one person in four years could single-handedly impact a machine as large and complex as the stock market, let alone the economy, is a stretch. In reality, presidents likely get too much blame and too much credit for the economy generally speaking, and there are far too many inextricable factors at play. And hopefully we’ve at least gotten through to you that to invest or not based on a political party would have historically done you a tremendous disservice from a wealth accumulation standpoint. Time in the market is more important than anything else, and timing the market is impossible—but timing the market based on political party is a trainwreck. Don’t base your investing philosophy or approach on any short-term politician or government makeup unless you’re prepared to be on the sidelines as the rest of the stock market keeps stock-marketing. Even Warren Buffet echoes it: “If you mix your politics with your investment decisions, you’re making a big mistake.”
That important over-arching disclaimer aside, there will of course be real economic and financial impacts from the way President Trump’s executive agenda plays out and what Congress is able to pass legislatively. One note: just because Trump will be negotiating with Republicans leading both houses of Congress does not mean everything on his agenda gets done. Let us not forget the speed at which things [do not] happen in government, especially significant changes to policy, and let us not forget that there is always healthy opposition, pushback, bargaining, and compromise. But because it’s a question on many people’s minds, it feels like a time to share with you a candid look at how our investment teams are assessing the “Trump Trade” this week and what we will continue to analyze in the weeks to come:
The tremendous rally we saw the day after the election and have continued to see to a smaller degree over the past few days is probably an overreaction (because it is not yet policy) to an expectation of corporate tax cuts (which could happen via an extension of the 2017 tax cuts set to expire by the end of 2025, as well as some additional proposed tax cuts) and less government regulation. In addition to these prospects, what else might happen under Trump’s agenda? The possibility of additional tariffs on imports from China of 20% or more, as well as other targeted tariffs, are likely. Also likely is less immigration. Budget cuts are also likely to be debated, which could negatively affect stocks of companies that do business with the federal government (for example, this could include health care companies and others that derive significant revenue from the US government). Also possible is an attempted repeal of clean energy tax credits and subsidies passed as part of the Inflation Reduction Act. Importantly, whether these things come to fruition is not certain, nor is the extent to which they do. However, what would be some of the investment implications if we see some of these agenda items come to fruition? If tax cuts happen on any level, this is very positive for US companies and therefore US stocks. Lower tax rates on companies make every company more profitable effectively overnight, at least on paper, which allows for greater business confidence and higher capital spending. Higher budget deficits call for a greater term-premium on bonds, meaning investors will demand a higher return to hold longer-term bonds compared to shorter-term bonds. Lower regulation drives higher mergers and acquisition activity. Higher import tariffs drive greater domestic manufacturing construction. Higher tariffs also drive higher inflation which drives higher bond yields.
We can speculate and debate what is uncertain, or what might happen in the future, until we’re blue in the face (and, to be honest, we will). But, we will not make predictions that influence our management. We will work to be timely and nimble in our assessment of the facts as they reveal themselves. And so let’s take a moment to state the facts as they stand. Real GDP growth is at 2.8%. Inflation is at 2.4%. Unemployment is at 4.1%. The S&P 500 is up 27% in 2024. President Trump is stepping into what, by many measures, is a pretty darn healthy, or “Goldilocks,” economy and market. It’s been a tremendous couple of years for investors. Folks who’ve been along for the ride have been rewarded handsomely for being a market participant, even in balanced portfolios. And investors are heading into year-end with continued market optimism and enthusiasm. But don’t forget that this market outcome was very hard to imagine at this time last year, or this time two years ago. And remember too, that predicting a recession over the past few years has been extraordinarily difficult. Nothing in the old playbook, or indicators that in the past have reliably predicted recessions, has worked so far this time around. Predicting the future is impossible, but by working within the confines of what we know and what we’re looking to achieve, we can confidently guide our clients through the noise and speculation.
Disclosures: The following statements are for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results, and there is no guarantee that any specific outcome will be achieved. The views expressed here reflect the authors’ current opinions, which are subject to change. The views expressed about the political landscape are based on subjective perspectives and may not apply to all individuals. Each investor’s situation is unique, and financial decisions should be made based on personal circumstances, goals, and financial condition. This commentary is intended to provide general information and does not constitute personalized investment advice. Please consult a financial professional for advice regarding your specific financial needs. Certain statements in this piece are forward-looking in nature and involve risks and uncertainties. Forward-looking statements, including the authors’ observations on market conditions, economic outlook, and potential impacts of political events, involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied. Factors such as economic and market conditions, interest rates, political events, and regulatory changes can all impact investment performance. References to market indices or specific sectors are for illustrative purposes only and do not represent the performance of any specific investment. Investment decisions should be based on an individual’s goals, time horizon, and risk tolerance, and any discussions on future market or economic conditions are for informational purposes only. Quotes from third-party sources are included for informational purposes and do not imply endorsement or association. Warren Buffett’s quote is provided for illustrative purposes and does not constitute an endorsement or investment recommendation by us. Investing involves risks, including possible loss of principal. The economic and market performance data cited in this commentary is historical and should not be relied upon as an indicator of future market conditions or investment performance.
