Trump(eting) a Victory

As of November 6, 2024. 

Donald Trump has returned to the White House following a decisive victory, with Republicans likely to control the Presidency, House, and Senate. This outcome may carry some implications for various policies and investment strategies. With the uncertainty of the election behind them, investors are expected to unwind their hedges. Trump's pro-growth policies are anticipated to boost equity markets and tighten credit spreads, although longer-term inflation concerns may emerge and impact the yield curve. Trump’s primary focus is likely to include energy, trade, tax cuts, deregulation and immigration. Investment themes will continue to evolve as his policies are further defined. 

At Nicola Wealth, our seasoned in-house portfolio managers closely monitor political and economic developments that could influence our investment strategies. This expertise ensures that we are prepared to adapt, if necessary, to shifts in policy or market dynamics with skill and insight, even amidst uncertainty. With experienced professionals at the helm, we remain committed to safeguarding and growing your wealth. 

Now, let’s reflect on the results of the 2024 U.S. election, the key outcomes, and their potential impact on the markets. 

What Happened? 

One of the most highly anticipated election nights has concluded, resulting in Donald Trump returning to the White House with a decisive victory. This outcome further highlights the potential inaccuracies of polling, which have been questioned since Trump’s initial win, Biden’s narrow 2020 victory, and now Trump’s latest success. It appears that historically absentee voters, now motivated to vote in person, may be playing a significant role in shaping future elections. 

Trump’s victory highlighted a remarkable wave of red for the country. More than 90% of counties shifted in favour of former President Trump in 2024 compared to the 2020 election. Looking at counties where votes have been fully counted, Trump improved his margin in 2,367 counties while only decreasing his margin in 240 counties.

At the time of writing, Republicans seem poised to take control of the Presidency, House, and Senate, although the House majority is slim and the Senate does not have a “super” majority. This composition will influence how much of Trump’s policy agenda can be implemented. Although his party holds control, enacting his full policy agenda may face challenges. 

Immediate Market Impact 

With election uncertainty now resolved, investors who hedged their positions are expected to unwind them. Trump’s pro-growth stance is anticipated to boost equity markets and tighten credit spreads, as investors reposition post-election, fostering a risk-on environment. Additionally, the Federal Reserve is likely to continue its rate-cutting trajectory, though potential inflationary pressures could become a concern. This was evident in the Fed’s decision to lower interest rates by an additional 25 basis points on November 7. The Fed based its decision on current data and its outlook, while markets have already begun pricing in potential Trump policies that could be significantly more inflationary. The 10-year yields have risen enough to eliminate the inverted yield curve, with a possibility of further steepening.

Assuming a full Republican sweep, budget reconciliation could be used to pass fiscal legislation, potentially leading to an increased fiscal deficit. This may prompt a continued sell-off in long-term Treasuries due to concerns over government spending and inflation, which could eventually temper the bullish momentum in equities. Sectors expected to benefit from Trump’s policies, including Financials, Technology, Defense, and Energy, are likely to see increased activity, particularly as deregulation fosters mergers and acquisitions. The yield curve is projected to steepen, while the U.S. dollar should maintain its strength, especially against currencies vulnerable to protectionist measures, such as the Chinese Yuan, Mexican Peso, and Euro.  

Key Policy Areas to Watch for Emerging Themes 

While there remains significant uncertainty about the specific policies Trump will enact and their degree of aggressiveness of such policies, we have identified five key areas likely to take precedence: 

Energy Policy 

Trump’s primary objective for energy policy is to lower energy prices, though regulatory constraints are the main challenge. He is expected to push for increased fossil fuel production to tap into the economic potential of the country’s vast oil and natural gas reserves. This could result in a stall of climate crisis efforts and possibly withdrawing the U.S. from the Paris climate agreement, as he did during his first term in office. However, a complete reversal is unlikely and would take time to implement. 

Trump may use executive order to shape environmental policy, such as fast-tracking pipeline approvals and eliminating clean energy targets. Nonetheless, new orders could face prolonged legal battles in court. Appointing conservative judges will be crucial for expediting these policy changes. Monitoring the appointments of new leaders in key regulatory agencies is also essential. 

It is worth nothing that many clean energy initiatives introduced under Biden created jobs and boosted economics in Republican states. A full reversal of these policies could be challenging and unpopular with constituents.  

Trade Policy and Tariffs 

China remains the primary focus of proposed changes to U.S. trade policy. There is bipartisan support for policies that protect U.S. industries, with many believing that China has acted unfairly, harming U.S. manufacturing. This includes stealing intellectual property and creating trade barriers that limit the competitiveness of U.S. companies. Trade policy is likely to be one Trump’s top priorities, and he will likely use tariffs not only as a standalone measure but also as a bargaining tool to secure concessions from trading partners. 

Some of the proposed policies are very aggressive, including a 10% blanket tariff and 60% tariff on China. With Republicans controlling both the House and Senate, broader reforms are more likely, especially since Trump has strong conviction in this approach. There is also potential for Canada to suffer collateral damage. In today’s interconnected economy, without a blanket tariff, countries could find ways to bypass targeted policies. Canada, and to a lesser extent Mexico, would be more insulated from these policies due to the U.S.-Mexico-Canada Agreement (USMCA). However, that agreement will be reviewed in 2026, potentially affecting industries like autos, lumber, dairy, and poultry. 

Fiscal Priority 

During his first term, Trump introduced significant tax cuts for corporations and individuals. Most corporate tax changes were permanent, but the personal tax cuts will expire at the end of next year. Trump is likely to extend these 2017 tax cuts and may seek to increase them for both individuals and corporations. However, aside from extending the cuts, any changes are expected to be more muted this time.  

Trump’s proposed spending and tax changes are already projected to add over $4 trillion to the deficit over the next decade. In January 2025, the U.S. will face the debt ceiling again, forcing Congress to act before new debt can be issued. As this deadline approaches, markets may become anxious, and fiscal responsibility could take a more central role.  

Deregulation 

During Trump’s first term, he focused more on halting new regulations than on full-scale deregulation. In his second term, he is likely to prioritize deregulation to support business businesses and help limit inflation. Along with deregulation in the energy sector, there will likely be reforms in heavily regulated industries, such as the financial sector and capital markets. Under the Biden administration, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice have worked to reduce monopolistic practices. Trump is expected to reverse some of this anti-competitive oversight, benefiting large technology companies and potentially increasing merger and acquisition activity overall.  

Reduced Immigration 

Immigration was a key issue in the election, with Trump promising a major overhaul of the U.S. immigration policy. Some of his proposals are controversial, including mass deportations, using the military for immigration enforcement, workplace raids, expanding the border wall, the “Remain in Mexico” policy, ending birthright citizenship, and ideological screening. Regardless of which policies he focuses on, there is likely to be a material move to reduce immigration. With fewer immigrants, the labour market would tighten, leading to wage pressures, and, in turn, inflationary pressure. 

Stay Focused on Long-Term Investment Goals Amid Uncertainty 

With Donald Trump’s return to the White House, investors may face a period of significant policy changes and market shifts. While his pro-growth policies are expected to stimulate equity markets and create opportunities in sectors like Energy, Technology, and Financials, there is potential for short-term volatility as his agenda takes shape. As Trump’s approach to tax cuts, deregulation, and trade policy unfolds, it’s essential for investors to remain focused on long-term strategies, even as they navigate potential short-term adjustments. 

Nicola Wealth portfolios are designed to aim for resilience during such periods of uncertainty, leveraging diversification through private investments and real assets. In addition, our cash flow-oriented approach aims to enhance liquidity and temper volatility, while our value-driven strategy allows us to act decisively amid market inefficiencies. These elements work together and have provided a historically consistent and stable foundation, as demonstrated by Nicola Wealth’s performance vs. the Marketplace since December 1999, regardless of evolving economic conditions.  

In conclusion, we do not consider either Republican or Democratic policies as reasons to deviate from our disciplined investment approach or to make significant portfolio adjustments. We remain committed to implementing changes based on fundamental investment principles, as we have effectively done during past crises. However, it remains uncertain whether the current environment constitutes a crisis.