Thus far the market has hardily approved of President Trump 2.0. The S&P 500 sat at 5712 on November 4th, just before the election. One month later, December 6th, the index closed at 6090, a gain of 6.6%. Will the economy and the stock market continue to thrive during Trump 2.0? There are many factors to consider. Let’s look at the key Trump policy positions to consider how they may impact the next 4 years.
Government Spending
Now that Donald Trump and the Republican party have won the Presidency, the House, and the Senate, what can we expect? First up is government spending. Government spending has soared over the past 2 years, rising to $6.9 Trillion or about 1.4 times Government receipts. Said another way, the government is now borrowing about $.40 for every $1.00 that it spends, an unsustainable path for the overall deficit. Nonetheless, this level of spending is highly stimulative. Debt fueled government cash flows into businesses, driving up profitability and stock prices.
During Trump’s first Presidency he was quick to spend and borrow, neglecting the traditional Republican fiscal conservatism. However, the economy is different now. The US National Debt has risen to more than $36 Trillion, or 123% of GDP. Moreover, interest rates have soared so that interest on the National Debt is over $1 Trillion per year, greater than the spending on National Defense. The Bond market is starting to care about the level of national debt so that careless spending could be dangerous. The US desperately needs to show some fiscal conservatism.
Enter Elon Musk, Vivek Ramaswamy and DOGE, the Department of Government Efficiency. This group has been tasked with increasing government efficiency, reducing waste, and reducing government spending to reasonable levels. Previous presidents have attempted similar projects without success. The problem of course is that much of that $6.9 Trillion in spending is non-discretionary, funding things like Medicare, Social Security, Interest on debt, and Defense. Once these expenditures are removed from the equation only about $1 Trillion of the $6.9 Trillion in government spending is considered ‘discretionary’. It is possible that Republicans will reduce spending, but the level and extent of the reduction is questionable based on history.
Taxes
Tax policy is another matter since Trump’s original Tax Cut and Job’s Act (TCJA) is still in force and is scheduled to sunset at the end of 2025. With Trump’s win most analysts expect Republicans to extend the current tax law or even make the changes permanent. This means that core tax policy is likely to be consistent with current policy. However, Trump has promised a list of additional cuts which include further reduction of the corporate tax rate, no tax on overtime, and no tax on Social Security. Details on these additional items is sorely lacking and the additional cuts will need to run the gauntlet in the House and Sente.
Tariffs
Tariffs are the big wildcard in a Trump Presidency, but the market seems to be shrugging off Trump’s threats, believing them to be a negotiating tactic. Trump has proposed 60% tariffs on Chinese imports and 20% on the rest of the world. This could spark a global trade war dampening the global economy and increasing the cost of goods. Or the threat could simply be the starting salvo in a negotiation, where Trump looks for key concessions before backing down. We will see where this all lands. Thankfully, Trump 1.0 included tariffs and did not tank the global economy. The market seems to be expecting this outcome.
Energy Costs
Finally, energy costs have been a centerpiece of Trump’s economic plan, as he promises to ‘drill baby drill.’ Lower energy costs are highly stimulative to the economy.
Overall
Overall, we expect Trump’s policies to include slightly lower government spending, lower taxes, higher tariffs, lower regulation, and lower energy costs, which we expect to be overall bullish for stocks. The biggest wildcard is tariff’s which could upset the apple cart, but we do not expect this outcome. Let’s hope for the best.
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