Week of November 8, 2024

This week I want to focus on the U.S. election result and the implications a second Trump term will have on the investment opportunities and tactical strategies to consider in the short- and medium-term.  Keep in mind that Congressional support is required for many of the campaign promises made. Below I have tabled the areas of the economy and legislative policy that will be front and center in 2025 and over the next 2-year period. 

1)    Tariffs

In the short-term, they will most certainly have a negative impact on the economy.  The costs of importing and manufacturing final products in the U.S. will increase, and this will result in inflationary pressure on consumer and producer prices.  This will have a negative impact on business net-income and consumer spending.  As you may recall, 70% of U.S. GDP activity is consumer driven. Therefore, in the short term tariffs will have a negative impact on growth and therefore equities.  They will also cause upward pressure on bond yields and result in a decrease in bond prices as upward pressure on inflation will result in interest rates remaining at elevated levels for a longer period of time than is currently priced into the market. 

(2) Immigration

Another key policy agenda for the Trump administration will be on curbing immigration into the U.S., especially for those that arrive there illegally.  Firstly, a decline in legal immigration will result in a decrease in the labour supply within a labour market that is currently robust, but also tight.  Second, should the administration implement a policy which results in the deportation of a significant percentage of illegal migrants, this will result in a decline in the labour supply but also put upward pressure on wage growth.  Many of the jobs filled by illegal migrants pay lower wages, and combined with the decrease in the labour supply this could also result in wage growth increasing.  In both scenarios, should wage growth become elevated this will result in upward pressure in inflation as well.  Both in the short- and medium-term this could drag down economic growth in the U.S.. 

(3) Regulation

Or should I say deregulation, is another hallmark of a Republican administration.  This is not necessarily a bad thing, though the impact on environmental initiatives will be undeniable.  It is important to note that the renewable energy sector was already facing headwinds as oil and natural gas prices have declined in relative terms since the pandemic.  Case in point, most of the U.S. auto sector has scaled down production on hybrid and electric vehicles due to waning consumer demand.  The sectors that will benefit the most from deregulation are expected to be materials, industrials, consumer discretionary and financials. The financial sector in the U.S. already had tailwinds to ride into 2025 with the prospect of a lower rate environment stimulating economic activity, but now regulatory measures such as Basel III (primarily focused on increasing capital requirements for banks) may be delayed or sidelined entirely.  

(4) Oil Policy

Drill, baby drill.  As simplistic as that campaign slogan was, it is no secret that the U.S. has ramped up oil production over the last decade.  It is expected that further deregulation is in the cards, coupled with policy initiatives focused on more traditional energy resources such as oil and natural gas.  This provides an investment opportunity and potential future upside in the U.S. energy sector.  Unfortunately, these tailwinds for energy in the U.S. would result in headwinds here at home as the demand for Canadian energy resources by the U.S. would inevitably decline.  I recommend monitoring domestic energy positions in your portfolio and consider adding to positions in the U.S.. The strength of the US dollar at this time may make this tactical change costly and untenable. 

(5) Taxes

Our expectation is for the previous tax regime from the last Trump Administration, the Tax Cuts and Jobs Act, to remain in full force after it is renewed next year.  It is also expected that corporate tax rates will be cut to 20%, though there is the potential that they could decrease to 15%.  With personal and corporate tax rates expected to decline this will have a myriad of effects to the economy.  Of note, in the short- and medium-term it will be a net positive to economic activity as both consumers and producers alike will be able to spend more.  Unfortunately, this could also result in upward inflationary pressure on prices given the increase in available free cash flow.  However, it will most certainly result in improved valuations in the equity market while at the same time resulting in an increase in bond yields as price inflation will necessitate a higher rate environment. Overall, the impact to the economy and equity markets should outweigh the impact to inflation and bonds and be net-positive for the U.S. 

(6) Government Spending and Debt Servicing

Under a Trump administration and a Republican Congress, the expectation is for tax cuts to result in a reduction in government revenue while spending will likely be allowed to increase above the Congressional Budget Offices’ current targets.  This could potentially add an additional $4.9 trillion USD in government debt according to analysis by BNP Paribas.  The U.S. government is by no means at risk of default, nor are they the only developed nation saddled with significant debt (see below).  Neither candidate indicated on the campaign trail that they would be reducing government spending in a meaningful way; however, the current likely scenario also results in the greatest negative impact to U.S. government debt.  The risk to you as an investor is the credit rating of the U.S. eroding further, though for now U.S. government debt remains attractively priced at current yields.

Summary

It is important to note that the executive branch of government in the U.S. is not all powerful and by no means holds absolute control over the direction of the country.  Many of the legislative changes that were proposed on the campaign trail will require congressional approval.   Markets have certainly welcomed the removal of election uncertainty and we have seen a meaningful rally this week in U.S. equities, however this euphoria has historically been short lived. Furthermore, your investment strategy should not be driven by “what ifs” but a long-term view and while making tactical changes as the markets and globally economy invariably change.  Until a concrete policy agenda is put forward by the next administration, I recommend maintaining a neutral investment strategy that is in line with your long-term risk and return objectives.  There will be tactical opportunities in the months ahead, however, now is not the time to be making changes to your portfolio.

If you or anyone you know would benefit from having a review of their portfolio and would like to understand the strategies we implement here at RBC Dominion Securities, I would be more than happy to connect at my coordinates below. 

If you have any questions regarding the information covered today feel free to reach out to me directly via LinkedIn, send me an email at matthew.valeriati@rbc.com, or give me a call at 416-699-0183.