November 5th, 2024
Happy election day.
This year has felt like an eternity, to say the least – the political polarity has divided so many of us. The chatter of politics has been in the background of most every conversation in recent memory. I don’t know about you, but it has exhausted me. And yet, we must do our part – educate ourselves on the topics at hand, and vote.
It is not my job to be political, give you my political opinion, or sway the way in which you vote. At this point on election day I believe your mind is made up. Instead, as we await today’s results, let’s consider the potential economic effects either candidate presents so we can best orient our investments.
Gridlock
First of all, it’s very likely that whichever political party wins the White House, will also capture the House of Representatives. Additionally, the Senate will more than likely remain under Republican control. That said, if Harris takes the Whitehouse, she will have a split congress. If Trump wins, he will likely have both the Senate and the House. Harris would have gridlock, whereas Trump would have a much more open landscape to implement new policy.
It’s common knowledge that the economy fairs best with a divided government. Gridlock is often the best-case scenario. More stability, and less uncertainty.
The stock market isn’t aways a great example of the total ‘economy’ but it does reflect economic activity, GDP and prosperity to a large degree.
Inflation
Americans are most captivated this cycle with inflation and the cost of living – it’s their #1 priority this election cycle. It’s no secret that inflation has been out of hand… But has it been resolved? And are folks generally, worse off than they were before inflation ran out of control?
The St. Louis Federal Reserve Bank did a study, Nominal Wage Adjustments during High Inflation and Tight Labor Markets, which found that “in the post-pandemic recovery years, which included high inflation, tight labor markets, and individual wage increases, which were more frequent and larger than in previous years: In 2020-2023, wages grew at 4.8% per year and consumer prices grew at 4.5%. In 2016-2019, they grew at only 2.8% and 2.1%.”
While the narrative is that folks are still worse off than they were pre-pandemic – due to inflation – it seems to be the case that wage growth has, in fact, outpaced inflation. Although the sticker shock is real, folks are more often captivated by a divisive political narrative than the numbers themselves.
That said, year-over-year, Core PCE – the Federal Reserve’s preferred inflation metric – sits steadily at 2.7%. Headline PCE, which includes food and energy costs, came in at 2.1%. It’s safe to say that inflation has been resolved. Yet, perception drives the narrative – not statistics – so let’s consider policy of either candidate and how it would affect inflation and the economy moving forward.
Economic Policy
Harris
In the case of Harris, she would have gridlock in congress and likely not be able to implement a ton of new policy. This means we’d likely experience our current trajectory. Status quo. That being, normalizing inflation and steady wage & GDP growth.
On the tax front, she hopes to raise taxes on big businesses and Americans making over $400k per year. She wants to reduce the tax burden on families, which includes a child tax credit. She has broken with Biden over capital gains tax, supporting a more moderate rise from 23.6% to 28% compared with his 44.6%. And she no longer intends to tax unrealized capital gains for the nations wealthiest Americans (those with $100 million in assets or more). When it comes to inflation, these policies are generally range from neutral to deflationary.
When it comes to oil, she has dropped her opposition to fracking – a technique for recovering gas and oil opposed by environmentalists – and has said she’d sustain the current policy toward US oil production. Which means the US will continue to be the world’s largest producer of oil and gas. A deflationary policy as the cost of energy – oil and gas – plays a huge factor in the cost of goods sold, transportation, etc.
Lastly, Harris has criticized Trump’s sweeping plan to impose tariffs on imports, calling it a national tax on working families which she claims will cost each household $4,000 a year.
She is expected to maintain the tariffs the Biden-Harris administration introduced on certain Chinese imports like electric vehicles.
Trump
With a Republican house and Senate, Trump would enact several policy changes from the current administration with little-to-no push back from congress.
Tax cuts are at the top of the list. He proposes a number of tax cuts worth trillions, including an extension of his 2017 cuts. With an additional reduction for the corporate tax rate from 21% down to 15%.
Trump says he will pay for these tax cuts through higher GDP growth and tariffs on imports.
There is good reason to believe that Trump will inspire higher GDP growth and, therefore, a larger US economy. He intends to do widespread deregulation – via executive order where possible and through congressional approval – this would free up many industries to move more swiftly and unlock profitability. Furthermore, lower corporate tax will bring back US corporation’s cash held offshore for reinvestment in the US as well as, more free cash flow from lower corporate tax.
Trump has made tariffs a central campaign pledge to protect US industry. He has proposed new 10-20% tariffs on most imported foreign goods, and much higher ones on those from China – ranging from 40-60% or even higher. Tariffs are Trump’s main way of replenishing tax revenue from other tax cuts.
In the case of lower taxes, and higher tariffs, we would likely experience a massive uptick in inflation. Less tax, means more cash in the system and, therefore, more inflation. Tariffs mean everything we import will cost consumers anywhere from 10-60% more – with very little supply produced in the US to fill these needs, the demand for US created goods will go up as well. The result is inflation, inflation, inflation. That said, the US stock market would likely flourish and long-term we would see lower income America see further job security through job creation- as well as, less dependance on foreign created goods.
It’s unclear if Trump plans to give handouts or tax credits for US companies who build new factories, etc., in the US. However, this seems like a must to off-set the impact of widespread tariffs. Again, the effect of handouts or tax credits would be inflationary.
Next up, immigration. Trump has promised the biggest mass deportation of undocumented migrants in US history. This would likely face legal challenges and, in my opinion, is the least likely policy he will enact. That said, he claims he’ll deport 22 million people – 6% of the work force – which is estimated to cost between $400-600 billion. This collection of folks tend to fill the low wage segment of our work force – leaving a gap in the market place and, again, is inflationary. Fewer low wage works, means higher paid workers needed to fill the space, or there’s less supply of what those lower wage works were providing.
Lastly, he vows to roll back more environmental protections, including limits on carbon dioxide emissions from power plants and vehicles – and intends to allow/expand Arctic drilling. This would likely reduce the cost of oil/gas tremendously. Which, is deflationary – as mentioned in the case of Harris’s plan.
Before we move on… Many of both candidates’ other policies are too opaque for me to comment on. They either lack in substance, exist in hyperbole only or don’t have a quantifiable effect on the economy.
The Deficit
The deficit came in as the 9th most important issue for voters this cycle. Voters seem to care less and less about ballooning debt. Austerity is not a popular policy – and we’ve largely seen neither candidate discuss our nation’s debt as part of their policy measures.
Our nation’s debt is a problem. Austerity is a solution. So is massive GDP growth so that the debt shrinks in its relative nature to our productivity. If we could combine the two that’d be great – but both will be massive to tackle. Regardless, this topic concerns me as it’s something both candidates choose to kick down the road to become later generation’s burden.
The Committee for a Responsible Federal Budget – a nonpartisan group – is out with a new analysis of Trump and Harris’s economic plans. The short of it: Both are going to increase the national debt by TRILLIONS of dollars. Please note, one is close to double the other.
So what do we do with our investments?
In either case, investing in those companies who create inherent value for society is always our goal. Doing so in a diversified manner that creates balance in our portfolios is not only wise, but needed as there are always unknowns that can rock the boat. In either case, policy will create change in market regime – some segments will grow faster than other – and I will keep you updated on where I see these shifts occurring.
Otherwise, I believe that Trump is the edge case where we would need to adjust our strategies more aggressively to accommodate a more inflationary environment. Remaining in equities like the Nasdaq is a perfect place to keep investable capital – as these companies will likely continue to outperform in such an economy. And lastly, investing in gold, digital gold (Bitcoin) and other commodities will need to become a larger weight in our portfolios, as these assets are a good hedge against inflation and the degradation of the US dollar’s value.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Economic Update
Market Update
Global Equities: US large cap equity indices were lower in the final week before the Presidential election. The S&P 500 slipped -1.4%, the Nasdaq fell -1.5%, and the Dow Jones Industrial Average ended the week -1.1%. Small caps fared relatively better than large caps and ended the week flat. Developed International stocks were down -0.6% and Emerging Markets ended the week -1.4% lower.
Economic Update
Inflation Data: The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditures (PCE) rose 0.3% in September, in line with expectations. Year-over-year, Core PCE remained unchanged at 2.7%. The Headline PCE measure, which includes food and energy costs, came in at 2.1%. Inflation continues to gradually make progress towards the Fed’s 2% goal, and the latest data should keep the Fed on its planned path for two more rate cuts in 2024.
October Jobs: The headline number of just 12,000 job gains in October may appear to be a disaster, however the data was skewed by two hurricanes and a major worker strike at Boeing. The unemployment rate held steady at 4.1%. Economists will look for the data to bounce back to normal levels next month, and the temporary distortion should not impact the Fed’s next rate cut decision.
