U.S. election recap: What could GOP policies mean for investors?

Donald Trump has been elected President again. TV networks called the race at around 5:30 a.m. Eastern Standard Time, and the AP called the race shortly after. A win in Wisconsin put him over the 270 electoral college vote threshold.

The market is responding how we would have expected in the event of a Republican sweep—U.S. large-cap stocks, small-cap stock, and bond yields are all sharply higher.

S&P 500 futures are up another +2.3% on top of yesterday’s +1.1% gain. Yesterday, all 11 sectors were higher, and breadth was the best since August (87% of constituents finished higher).

Small-cap stock futures are up +6.5% on top of yesterday’s +1.9% gain, and are at one-year highs. The VIX Index (a measure of implied volatility) is collapsing ~5 points because the election outcome became clear so quickly. On the other hand, Hong Kong’s Hang Seng Index is down around -2.5% from yesterday’s highs. 

In commodities and currencies, gold is down slightly this morning (-0.8%) $2,744/ounce, as is oil ( -1.25% to $74.5/barrel). Bitcoin is trading at all-time highs and has gained 10% over the last two days.

The key takeaway from the price action is that markets are more focused on the pro-growth policies rather than the risks of tariffs or increasing deficits. Bond yields are higher, but so is the dollar, and risk markets are performing exceptionally well. Sectors that are exposed to regulatory risk, such as small-cap banks, are also performing well. If deficit concerns were the focus, the dollar and stocks would be weakening as bond yields rise.

Your election recap

President Trump is on track to win every swing state. Republicans have won control of the Senate, and while the House of Representatives is still officially a toss-up, markets seem to think Republicans will win a slight majority. There are still 60 seats outstanding in the House, and it could take several days to a week to declare winners in all of the outstanding races.

Even if Republicans do end up winning the House, it seems as if their margins will still be slim. This means that negotiation and compromise will still be necessary for major policy proposals. Here is an updated look at the key issues.

On taxes: While there is still a long way to go in Tax Cuts and Jobs Act extension negotiations, it seems as if the “worst-case” market outcomes may have been avoided (e.g., higher taxes on capital gains, QDI treatment and tax exemption of municipal bond income). That said, a full extension of the TCJA may not be palatable to members of Congress who are worried about the deficit. The provisions of the TCJA won’t expire until the end of 2025, so we wouldn’t expect decisions to be made until the back half of next year. 

If fully extended, personal tax rates will stay at current levels outlined in the chart below:

Regardless of what may be enacted next year, it is a good time to reflect on giving wealth to future generations, whether outright or in trust if it aligns with your financial situation and goals. That’s principally because all future appreciation on those assets would not be subject to future U.S. estate tax on your (or your spouse’s) death.

On trade: President Trump has proposed an increase on tariffs to 60% on all Chinese goods and up to 10% on all other imports. While higher tariffs on China seem likely, the broad tariffs on all trading partners face much higher legal hurdles. The dollar is strengthening this morning as markets perceive that tariffs will extend “U.S. exceptionalism.”

On immigration: The President does garner relatively more power when it comes to immigration policy. President Trump has proposed much stricter immigration measures and an effort to deport asylum seekers. We should expect that immigration will slow considerably, though it is notable that during Trump’s previous presidency, he called for the deportation of 11 million immigrants, but there were only about 300,000 deportations per year from 2017 to 2020.

On the deficit: We said that regardless of the candidate elected, deficits will likely increase. As Michael Cembalest pointed out in his paper, Mind the Gap, President Trump’s policies as proposed would increase the deficit by ~$4 trillion. As previously stated, tight margins in the House and Senate will provide a buffer against this type of deficit expansion. That said, the move in bond yields suggests looser fiscal policy, better growth prospects, a higher landing place for the Federal Reserve, as well as higher inflation.