U.S. elections: What they mean for the economy and markets

What sorts of market-relevant policies can we expect under a Trump presidency?

Market policies under a Trump administration are likely to be shaped by his hardline stance on trade and immigration. Key measures include:

Trade

President-elect Trump is a staunch supporter of tariffs, calling it the “most beautiful word” in the dictionary. Indeed, he has threatened to impose 60% tariffs on China, and 10-20% tariffs on imports from all U.S. trading partners. If he follows through on these threats, it will represent a major escalation from what he did in his first term, during which he imposed 10-25% tariffs on China.

Tax and spending

Trump has promised large tax cuts, which he plans to partly fund through tariffs and cuts to environmental spending. He has also proposed significant spending increases in areas such as defence, border protection and deportations, and suggested moderate hikes to spending on health care and housing.

Yet tariffs and cuts to environmental outlays are not projected to be nearly enough to pay for his proposed tax cuts and spending. The result? A full implementation of Trump’s plan would see a large rise in the U.S. government deficit. But the extent to which his tax and spending plans are implemented will be determined largely by whether the Republicans control Congress.

Immigration

Trump is expected to be tough on immigration, vowing to deport the roughly 11 million unauthorised migrants in the U.S. He also proposes to restrict legal migration, imposing “extreme vetting” of visa candidates and ideological screening.

What are the implications of Congressional control?

Any new laws (which includes taxation and spending) need to be approved by both chambers of Congress – the House of Representatives (the “House”) and the Senate.

We already know the Republicans have won back control of the Senate, and we’re still waiting to find out if they’ve maintained control of the House, with several races too close to call. We may not know which party ends up with control of the House for several days, but the betting markets strongly believe the Republicans will win. Polymarket, the world’s largest prediction market, implies a 95% chance of a Republican sweep.

If the Republicans win the House, can we expect all the tax cuts and spending that Trump has promised?

Trump is unlikely to be able to deliver all the tax cuts and spending that he promised during his campaign. Why? Because it’s likely he won’t have the support from members of his own party in Congress to do this.

Republican Senator Rand Paul has been particularly critical of government deficits. And his criticism has extended to his own party, with Trump’s deficit-busting policies in his first term a big reason why he refused to endorse Trump in this election. There will likely be other Republican senators who may also be reluctant to ramp up deficit spending, too.

As a base case, we could expect a Republican Congress to extend the 2017 personal tax cuts for everyone. But when it comes to other Trump tax-cutting proposals, such as not taxing tips, overtime pay or social security benefits, I would expect several Republican senators to put up resistance.

Some Republicans in Congress have proposed cutting spending on programmes such as Medicare and Social Security to pay for tax cuts, which Trump does not want to do as it would be very unpopular. It will be interesting to see how these discussions unfold, particularly given the Republicans’ previous inability to repeal Obamacare during Trump’s first term.

But what if the Democrats win control of the House?

Although this appears unlikely, it’s still possible. If this ends up being the result, given rising polarisation, there would be very few of Trump’s policies that the Democrat-controlled House would agree to.

Among the few areas where Republicans and Democrats could work together is on legislation aimed at containing China, and possibly the extension of personal tax cuts for households making less than $400,000 per year. But crucially, even without Republican control of Congress, Trump would retain significant latitude to implement his policies in areas such as regulation, foreign policy, trade and immigration.

How will Trump’s policies impact the economy?

Tariffs are quite possibly a bargaining chip for Trump. However, if he went ahead with his threats, countries with large trade surpluses relative to the U.S. would be among the most negatively impacted. Nevertheless, in a global trade war, it’s likely the U.S. economy would also suffer.

According to estimates from think tank, the Tax Foundation, a 10% trade tax matched with in-kind retaliation would shrink the U.S. economy by 1.1%. With this in mind, it’ll be interesting to see just how far Trump is willing to go on tariffs, and how willing other countries are to make concessions to the U.S., potentially preventing an all-out global trade war.

The growth of the labour force has a big impact on an economy’s aggregate growth rate. Considering this, Trump’s immigration goals could potentially weigh on U.S. growth.

As discussed above, how fiscal policy evolves depends on whether Republicans win back control of the House and, if they do, how willing Republicans in Congress are to tolerate budget deficits. However, it’s worth noting that most of the value of Trump’s proposed fiscal measures come from tax cuts. The impact on growth from tax cuts is not particularly high. And to the extent that the tax cuts are financed by reduced government spending, that should weigh on growth. Additionally, the rise in bond yields resulting from the issuance of all the new government bonds the market will need to absorb will pose a headwind to economic growth.

How will the UK be impacted by Trump’s policies?

The UK would probably not be as negatively impacted by higher tariffs as other countries, but it would likely still suffer (witness the decline in the pound versus the dollar today). UK exports in the auto, pharmaceutical and liquor sectors would be particularly impacted by U.S. tariffs.

The UK government would likely retaliate, imposing its own tariffs. This could then push up inflation in the UK. The net impact on interest rates would depend on whether the downward effect from weaker growth was stronger than the upward effect on inflation.

Trump has also promised to pull the U.S. out of the Paris Climate Agreement, which has implications for the UK and the rest of the world. While Trump’s less solid commitment to NATO also has security implications for the UK, as does his weaker support of Ukraine. 

What has been the market impact of the election result?

The U.S. dollar has surged on the back of the election result, reflecting the likelihood that Trump trade policies will cause the growth gap between the U.S. and other countries to widen. The 10-year U.S. Treasury yield has also shot higher, reflecting the potential for greater deficit spending. Meanwhile, U.S. stocks have rallied, with investors bullish about the impact of deregulation and fiscal stimulus under Trump.

Following Trump’s campaign promise to make the U.S. the crypto capital of the world, Bitcoin has rallied to a new high. Tesla shares have also surged, as markets expect Trump supporter Elon Musk to benefit from his win.

On the other hand, the oil price has moved lower, largely on the back of expectations that Trump policies will result in greater U.S. oil and gas production. We doubt this is moving markets today, but Saudi Arabia could flood the market with supply at some point. Why? In order to prevent U.S. shale companies from gaining further market share and also limit the extent to which they are willing to aggressively boost production in the future.

Is a Trump presidency good news for equity markets?

Global equity investors should be wary of the likely rise in trade uncertainty that will occur under Trump, with the potential for an all-out global trade war. Additionally, the weaker immigration expected under Trump should also act as a headwind on U.S. growth.

Furthermore, Trump’s trade, immigration and fiscal policies may result in higher bond yields than would otherwise be the case, posing a challenge for economic growth and the equity market. That said, equity investors should welcome the deregulation drive that will now likely occur under Trump, as well as the potential for some tax cuts in the event of Republican control of the House.

While politics and fiscal policy play a crucial role in determining market direction, a host of other variables, including the stage of the economic cycle, monetary policy, sentiment, and valuations, are also key drivers of investment performance. We continue to believe there is scope for global equities to keep moving higher, driven by the ongoing strength in corporate profits.

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