The results of the US election are in: former President Donald Trump is returning to the White House. In the immediate wake of the results, markets saw the so-called “Trump Trade” take off – US equities rallied, the US dollar strengthened, and 10-year US Treasury yields climbed.

But looking past these near-term market moves, it’s important to remain focused on the bigger picture – in particular, what another Trump presidency means for the broader economy. Let’s take a closer look.

Key takeaways

• Expect looser tax policy and tougher trade policy: Among the key features of president-elect Trump’s policy agenda are domestic tax cuts, via the extension of his Tax Cuts and Jobs Act (TCJA). Another is tariffs, with a proposed across-the-board rate of up to 20%, and 60% on imports from China. Each has broad implications for growth and inflation.

• Policy plans are a mixed bag, but a pro-business stance could support growth: For growth, tax cuts are expected to be stimulative for the US economy – tariffs, on the other hand, are less positive. That said, Trump is known for his pro-business stance and preference to roll-back regulation, which could support the outperformance of US equities and other risk assets. In addition, now that the outcome of the election is known, that’s removed some of the uncertainty for firms that had held off on major plans ahead of the vote.

• Inflation could stay higher for longer, complicating the Fed’s job: The “price to pay” for Trump’s economic policies is likely a widening of the budget deficit and a continued increase in US debt. Paired with the impact of potential tariffs and lower labour-inflows due to expected restrictions on immigration, that’s likely to add upward pressure on inflation in the years ahead. This will take time to materialise, however, so we see the Fed continuing to cut rates by another 25 basis points (bps) at its last meeting of the year to support a softening labour market. The challenge for the Fed will likely start next year – once Trump is in office and his policy agenda is set in motion.

• Don’t be distracted by short-term political noise. Look to the long-term fundamentals. As we gain more information about Trump’s Cabinet and policies – particularly on trade – we may see some large market swings in the near-term. But remember that it’s the longer-term picture for growth and inflation that matters more for asset allocation. Here, our ERAA™-managed portfolios are already well-positioned for continued economic expansion and higher inflation. Such an environment is supportive of equities and gold, though less positive for longer-duration bonds.

Growth may be supported by looser fiscal policy and greater certainty, despite potential tariff headwinds

A central pillar of Trump’s policy agenda is a more expansionary fiscal stance, primarily via tax cuts. That includes the extension of the Tax Cuts and Jobs Act (TCJA), which was enacted in 2017 and scheduled to expire in 2025, as well as further cuts to individual and corporate taxes.

Paired with his broadly pro-business stance and inclination for deregulation – which were also trademarks of his first presidency – these factors should be favourable for business confidence and investor appetite.

Another factor supporting business and investor sentiment is more certainty, now that the outcome of the election is known. We shared a few months back that uncertainty surrounding the US election was translating into temporary softening in the economic data, as well as increased market volatility. (Read more here: CIO Insights: Why US recession risks may be overstated). With this hurdle removed, that adds to scope for sustained US growth and continued outperformance for US risk assets.

Pulling in the other direction, the potential for tougher trade policies could create headwinds for the economy and markets. The prospect of more aggressive tariffs – or a blanket rate of 10–20% for all imports, and a higher rate of 60% for those from China – are likely to erode household spending power and hit corporate profit margins. That said, the full scope, magnitude, and timing of any such tariffs are yet to be determined.

Inflation could stay higher for longer, complicating the path for the Fed

While Trump’s looser fiscal stance and pro-business policies are a net positive for near-term growth prospects, there is a price to pay in the form of a wider budget deficit and growing debt.

As illustrated in the chart below, the nonpartisan Committee for a Responsible Federal Budget estimates that Trump’s fiscal plans could result in US debt climbing to 143% of GDP by 2035 under its central case. That’s 1.4x more than where the country’s debt burden stands today and 18 percentage points higher than projections based on current legislation.

Importantly, rapidly rising deficits can have knock-on effects for inflation. We witnessed this most recently with the tremendous fiscal stimulus in response to the COVID-19 pandemic, which boosted demand and exacerbated the impact of supply-chain disruptions.

Academic studies also validate this relationship, with the Bank of International Settlements estimating that a 1 percentage point increase in the fiscal deficit can result in an average inflation of between 0.1-0.5 percentage point over the subsequent 2 years. 

On top of a rising deficit, other aspects of Trump’s policy platform could also contribute to inflationary pressures. Tariffs in particular directly increase the costs borne by businesses and consumers, while deportations of unauthorised immigrants and other restrictions on immigration – especially as it impacts lower-wage workers – can constrain the labour supply and add to price pressures.

This potential for higher inflation will complicate the Fed’s plans to continue cutting interest rates – though that will likely be a problem for 2025 and beyond, as it will take time for these policy plans to be set in motion and the potential impacts on inflation to materialise.

In the meantime, the Fed is likely to continue to gradually bring rates back down to neutral territory to support employment, including another 25 bps cut at its last meeting of 2024.

Our portfolios remain well-positioned for an environment of economic expansion and higher inflation

Elections can be exciting and emotional events. As the details of Trump’s Cabinet and policy plans are rolled out in the months ahead, markets may react sharply to the headlines. That’s why it’s important to remain focused on economic and market fundamentals like growth, inflation, liquidity and corporate earnings, for example – these factors are what ultimately drive markets.

Here, our portfolios managed by our Economic Regime Asset Allocation (ERAA™) investment framework have been positioned for an environment of sustained economic growth and higher inflation as of our latest re-optimisation in April.

That means a greater emphasis on risk assets like equities – with a focus on cyclical sectors like industrials and aerospace, which would benefit from increased infrastructure spending and capital outlays. In fixed income, that means a focus on shorter-duration bonds. And our overweight exposure to gold should remain supportive in this period of high inflation and elevated geopolitical tensions. 

Taking a big picture view, the short-term moves after elections tend to be dwarfed by the longer-term impact of the macroeconomic cycle. Over the past half century, US assets have marched steadily upward no matter which political party was in control of the White House – ultimately reflecting the fundamentals of the world’s largest economy.

As illustrated below, an initial investment into US equities of ฿10,000 at the start of 1973 would be worth ฿2.1 million today, or an annualised return of 11%. The same investment in US Treasuries would be worth ฿233,000 – or an annualised 6% return (with less volatility) over that period.

To avoid getting caught up in near-term political noise, keep it simple – we recommend staying invested in a globally-diversified portfolio that matches a level of risk that you’re comfortable with. This helps you ride out any potential market volatility, political cycles included.