Navigating Political Uncertainty

Former President Trump has secured victory in the 47th U.S. Presidential election, with Republicans reclaiming control of the Senate and likely to take the House as well. While Americans experience a range of reactions, our attention remains firmly on the investment landscape. History has shown that markets can prosper under diverse political conditions, and maintaining a diversified portfolio is essential for managing risk and navigating uncertainty.

The market’s initial response has been a strong rally in equities and treasury yields, although future policy and its effects remain uncertain. While many promises were made during the campaign, it is still unknown what the Trump administration’s true policy direction will be or the implications to the economy and markets. We are monitoring policy developments closely as they pertain to potential impacts on our portfolio positioning.

Policy Matters, but It Is Rarely the Main Driver of Market Returns

While policy changes under a sweep could affect economic growth, inflation, and market performance, the main long-term driver of equity returns comes from underlying business and macroeconomic fundamentals. For example, despite President Trump’s support for traditional energy and President Biden’s focus on clean energy, the S&P 500 Energy and Clean Energy indices performed in ways that didn’t align with these policy priorities, with clean energy outperforming under Trump and traditional energy outperforming under Biden, highlighting the limits of policy as a driver of market performance.

Current business and macro fundamentals remain supportive for risk assets as earnings growth, consumer spending, economic growth and the labor market have remained strong while the Fed is gradually easing monetary policy. This set up has eased concerns on heightened valuations in the U.S. equity markets for now, but concerns may resurface if treasury yields continue to rise.

Fiscal Deficit and Treasury Yields

Strong macroeconomic and business fundamentals in the face of monetary easing and large fiscal deficits have led long-term interest rates higher. Investors are bracing for higher growth that could spur higher inflation. The fiscal deficit will likely remain a big topic moving forward as tax cuts and tariffs could amplify the deficit and lead to higher interest rates which would likely pressure domestic markets. President-elect Trump ran on the possibility of creating a government efficiency role to try to balance the budget. This is a step in the right direction, but with the majority of the budget consumed by non-negotiables like Social Security, Medicare, Medicaid, Defense and Interest, it will be hard to make progress. Treasury yields will likely remain volatile until there is more clarity on policy regarding taxation and government spending.

Over the months and quarters to come, we will have more clarity on new policies and their implications. These include topics such as tariffs, immigration reform, regulation reform, and extension of the 2017 Tax Cuts and Jobs Act (TCJA), and potentially lowering the corporate tax rate for domestic manufacturers from 21% to 15%. The initial reaction suggests investors expect more growth and inflation under a Trump presidency. This rally in stocks and yields will require more clarity on policy to be long lasting. While regulation reform and tax cuts are viewed as business friendly, they will likely come at the price of higher fiscal deficits which could keep long term rates higher for longer. On the other hand, tariffs are largely considered a negative for business and consumers, resulting in higher prices and lower exports from retaliatory tariffs, but the actual implementation of tariffs is still an unknown. The depth and magnitude of tariffs will be critical in forecasting their effect on markets.

Staying Invested and Diversified

As we mentioned in our Mid-Year Outlook, time in the market is far more important than timing the market. Looking back from January 1975 to June 28, 2024, investing in the S&P 500 only under Democratic or Republican administrations was a poor choice compared to staying in the market regardless of the party in control.

To further drill this point home, despite contrasting policies under the Obama and Trump administrations, market performance remained remarkably similar. The S&P 500 achieved an average annual return of 16.3% under President Obama and 16.0% under President Trump according to J.P. Morgan.

In conclusion, while political shifts can create short-term market volatility, history has shown that long-term market performance is more deeply influenced by business and economic fundamentals than by changes in policy. As we await further clarity on the direction of President-elect Trump’s administration, particularly around taxation, tariffs, and regulation, it is essential to maintain a balanced, diversified portfolio that can adapt to new opportunities and risks. The initial market rally reflects optimism about future growth, but caution is prudent as fiscal and monetary policies evolve. By staying flexible, monitoring policy developments closely, and adjusting asset allocations as needed, we can navigate these changes and position portfolios effectively for long-term growth. Ultimately, a disciplined focus on staying invested and diversified is the best strategy for navigating any political environment.