Election Aftermath 2024

“The excess government spending is what causes inflation! ALL government spending is taxation. This is a very important concept to appreciate. It is either direct taxation, like income tax, or indirect via inflation due to increasing the money supply.”

-Elon Musk

The dust has settled, the votes have been counted, and Donald Trump is once again president-elect of the United States. The question now is, “What does this mean for us?” For many, the results are reason for excitement and joy, while others undoubtedly feel grief and are uneasy. These emotions are all reasonable and understandable. As your financial advisor however, I just want to remind you that investing, and emotions do not mix. So, regardless of your political opinion and whether you are either happy or upset with the results of the election, I recommend not making big changes based on those feelings. The market did well after Trump won last time and it did well after Biden won in 2020. Both times I witnessed investors make political decisions with their money that they later regretted. It has been a while since we have sent out a newsletter. We almost sent one out pre-election, but did not feel it was helpful as it was written with a lot of “ifs.” Now that we have clarity and clear results, let’s examine some of the ways that a second Trump term may affect the economy and the markets.

Trump’s Tax Policy

In 2017, Congress passed the Tax Cuts and Jobs Act, the most significant update to the tax code in decades. Among other things, the bill reduced tax rates for individuals and corporations. A major component of the tax bill was a doubling of the standard deduction and the federal estate tax exemption. These tax cuts are currently set to expire on December 31, 2025. However, with Trump back in the White House and a Republican Congress behind him, it’s a safe bet that they will look to extend these cuts further. Trump’s tax proposals don’t end with simply renewing the TCJA. He has also proposed lowering the corporate tax rate to 15% (its currently at 21%.) Eliminating taxes on social security is also a real possibility and has been a hallmark of his campaign. Should that happen, it would be a major boon to many Americans. So, look for more information from us in the future as these proposals start making their way through Congress.

What does this all mean for the economy and the markets? Well, lower taxes are a good way to juice economic growth, as they can prompt increased consumer spending. Lower corporate taxes also help companies invest, expand to new markets, and boost profits. This in turn, could propel the stock market to new highs and as investors, that’s exciting! It may be a little early to celebrate as changing the tax code as not as easy as it appears. Republicans control both branches of Congress, but a vote to extend the tax cuts is far from a guarantee. Why? Three words: The National Debt.

Our county’s debt is a bipartisan problem that has swelled under both parties. Since the pandemic, the national debt and deficit have both risen precipitously and the current national deficit sits at $1.8 Trillion. The National Debt is now over $35 trillion and is starting to increase at an exponential rate. When you couple the debt and deficit with higher-than-average interest rates, it makes it even harder to pay down the National Debt. Many economists project that new tax cuts will only cause the deficit to balloon further. For this reason, it is possible some Republicans may be hesitant to sign off on lower tax rates. Only time will tell, but we are watching it closely as it is an important factor for financial planning.

Tariffs and Income Taxes

One of the ways president-elect Trump has proposed to offset these potential tax cuts is through the use of tariffs. It’s a familiar tactic for anyone who remembers his first term in office. However, the tariffs he is proposing this time around are on a different magnitude all together. Put simply, a tariff is a tax on imported goods. Tariffs have historically been used to make buying foreign goods more expensive, encouraging consumers to buy locally produced products instead. Think of it as a way of protecting certain American industries from outside competition. In his first term, Trump famously enacted a wide range of tariffs on Chinese goods. China retaliated with tariffs of their own. This launched the so called, “trade war” that dominated much of the economic discourse until Covid came along. For his second term, Trump has proposed raising tariffs to anywhere from 60% to 100% on Chinese goods… along with a universal tariff of 10%-20% on all imports in general.

While often given a bad rap, tariffs do raise revenue and are a tax alternative. In fact, for much of our country’s history, tariffs were a prime source of government income. This began to change around the turn of the 20^th century. Two pieces of legislation passed in 1913, drastically changing tax, monetary, and fiscal policy. The Federal Reserve Act of 1913 and the Revenue Act of 1913 created the Federal Reserve and introduced the federal income tax to the United States. The creation of a central bank and the ability to tax income of citizens greatly expanded the central power of the Federal Government. Many economists from the Austrian school of economics look at these bills as the root to many of the economic problems we have today. Certain politicians like Ron Paul have championed the objective of eliminating the Federal Reserve. He literally wrote a book called End the Fed. The core belief is that the free market is better and determining what the interest rate should be than a committee of bankers, They also believe the supply of money should not be determined by the same committee at the central bank.

The Federal Reserve

On Thursday, November 7^th, just a day after Trump was declared president-elect, Jerome Powell announced a quarter point interest rate cut at the latest FOMC meeting. The cut was in line with expectations and brought the federal funds rate to a target range of 4.50%-4.75%. The real drama was not the interest rate cut but the press conference and interview that happened while announcing the cut. Trump has been a prominent critic of Fed Chair Powell over the last year over what he perceives to be a politically motivated Fed. Trump has even suggested that he would fire Jerome Powell once in office despite being the President who appointed him during his first term in 2017. Powell was asked during the meeting if he would step down if President Trump demanded it, to which he gave a one-word answer, “no.” Powell insisted the decisions made by the Federal Reserve are not politically motivated and that the President does not have the authority to fire a Federal Reserve Chairman. It is too early to speculate how this will play out, but it is safe to say that the next administration and the Federal Reserve will most likely not be seeing eye to eye.

Government Spending

With a reduction in taxes and increase in tariffs most likely, the other end of the national debt problem that needs to be solved is excess government spending. Trump does not have a good record of slashing government spending or being a fiscally responsible President. His first term saw the national debt skyrocket due to his tax cut policies and dramatic increase in government spending. His supporters and even his detractors alike will acknowledge an unprecedented pandemic, but the results are still the same. This time around, there is no pandemic, but the results of past policies are starting to take shape. The US debt is now over $36 trillion and politicians on both sides of the aisle are starting to realize that it is becoming a problem.

One of the more interesting developments over the last week has been the creation of The Department of Government Efficienc. A planned presidential advisory commission announced by Donal Trump, it will be led by Elon Musk and Vivek Ramaswamy. Despite its name, it will not be a formal federal department. However, its impact could be dramatic and immediate. Musk has stated that he thinks the commission could reduce the US Federal Budget by $2 Trillion. Elon and Vivek have both been campaigning and making the case for cuts to government expenditures citing large amounts of waste that will be cut immediately.   

Despite the ambition of Donald Trump to implement his agaenda, some of his policies could be watered down or shelved as change usually comes slow in Washington. There are so many opinions, so many stakeholders, that proposals often get diluted or tabled. Just because a politician proposes X in order to achieve Y does not mean it will necessarily happen. That’s why we should adopt a wait-and-see attitude when it comes to Trump's second term.

Another reason to take a wait and see approach. History has shown us that the presidency has far less of an impact on the markets than people think. From 1945 through 2020, the S&P 500 has risen an average of:

• 13.6% with a Democratic president and a split Congress
• 13% with a Democratic president and Republican Congress
• 12.9% with a Republican president and Republican Congress
• 9.8% with a Democratic president and Democratic Congress
• 5.8% with a Republican president and a split Congress
• 4.9% with a Republican president and Democratic Congress

These numbers illustrate an important truth: The stock market isn’t driven by one person or one party. It’s driven by the ebb and tide of trade. By the law of supply and demand. By innovation and invention. By international relations and consumer confidence. The market is an ocean – and politics but a single tributary emptying into the vast, ever-changing sea.

So, what’s the takeaway? The takeaway is that you might be happy Trump won, or you might be upset. Both are perfectly normal, legitimate emotions to feel. But neither emotion will drive our planning. Some of his policies will affect the markets positively. Others may be negative. Some will have no effect at all. So, rather than change our investment strategy, we’ll continue to determine how much you need to reach your financial goals. We’ll continue analyzing how much risk we must take on to help you get what you need. Finally, we’ll position ourselves as best we can to take advantage of future market growth and weather future market volatility. We’ll continue helping you work towards your goals by relying on planning. Not politics.

We hope you found this message helpful. Of course, if you have any questions or concerns, please let me know. That’s what I’m here for. In the meantime, enjoy the upcoming holiday season!

Sincerely,

Bruce Carlson, CFP®

President

Carlson Asset Management

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

The article and any opinions expressed therein are those of Carlson Asset Management and do not necessarily represent the opinions or strategies of Dorsey, Wright & Associates, LLC