Post-Election Thoughts
By Dr. Charles Lieberman, Co-founder and CIO
How should investors adjust portfolios in light of Trump’s election? We offer a few thoughts below.
At the macro level, Trump is likely to support the following: higher tariffs, especially on imports from China, reduced regulation, lower tax rates, and lower interest rates. Not all of these are mutually compatible. But there are some important economic implications. Republicans will command a majority in the Senate and likely of the House, giving Trump a strong hand to push his programs. But it remains to be seen which campaign promises will get priority or even find their way into policy.
Higher tariffs will, of course, raise prices for imported goods, or allow domestic manufacturers to raise price, because higher import prices enable them to do so. There is a national security element to this strategy, so the economic costs are just one element for consideration. Still, inflation will be higher than otherwise, which implies interest rates will be higher and the Fed may find itself with less room to reduce policy rates, or less reason for doing so. We have been concerned about this for some time, since the Biden Administration also favored trade restraints, notably against China. There are numerous investment implications. The prospect for interest rates to be higher is reflected in our efforts to keep fixed-income durations shorter than our benchmarks. We have also favored companies that benefit from bringing manufacturing onshore or closer to shore, especially for many technology companies that have sizable operations in China. These likely initiatives have been known for some time, so we have been discussing them and taking them into account in our investment discussions.
The Biden Administration has been very active in regulating parts of the economy, including the energy sector and banking. There is every reason to believe Trump will reverse many of these regulations. And there are many examples that affect numerous industries. In the energy space, Biden suspended approving new applications for LNG export terminals pending government review and it appears that the Energy Department is going to rush to complete the report while Biden remains in office to constrain Trump from allowing new terminals to be built. Even so, such regulatory hurdles will likely be overcome fairly quickly once more pro-energy administrators are appointed. Similarly, bank mergers, which are badly needed for smaller firms, have been subject to high hurdles that will likely be torn down quickly once new people are brought in to head key agencies, like the SEC, OCC, FTC, and others. Less regulation may also increase the lending capacity of banks and other financial firms, thereby promoting profits for these firms and a bit more investment activity by borrowers.
Some of the regulations or supports for renewable energy supply may be discontinued. Much depends on how this occurs. A mandate to require auto companies to sell one EV vehicle for each IC vehicle is likely to be eliminated. But the longer-term push to replace IC vehicles with EVs may continue, even if in some more muted form. We suspect the government will still be supportive of investment in solar, wind, and even nuclear energy, even if policy becomes less intrusive.
Immigration policy is very likely to change sharply, with higher hurdles to illegal immigration and the possibility of deportations of illegal immigrants. Fewer immigrants, legal and illegal, implies slower growth in labor supply, so slower economic growth. Slower immigration also implies slower population growth, which would moderate the growth in consumer demand. There are also effects at the industry level. Immigrants are a key component of labor supply in agriculture, restaurants, and other low wage industries, so a reduced supply will drive up labor costs and prices. But the impact may also be felt at the national level with higher prices, so a bit more inflation, even as overall economic growth slows.
It is also likely that a Trump Administration will be spending more money on national defense. The Biden Administration has been very supportive of Ukraine and Israel, but this has depleted inventories of munitions and other weaponry. Any incoming government would have continued the effort to replenish these stocks. But the nature of warfare is evolving very quickly, and our defense establishment must respond and adapt. We will need to spend more money on cheaper, more technologically advanced solutions. And it is likely that Trump will press our allies to also commit more to such an effort, especially in Europe where military spending is still not up to agreed upon levels. Spending on drones, munitions and AI should see additional funding.
The equity market reacted very positively to the election outcome, while the bond market retreated, which properly reflected the implied likely economic effects of Trump’s policies. This was simply the headlong effort of investors to realign holdings with the expected change in direction for policy at the top level, since many investors expected a very different election outcome. We tried to be far more balanced in our approach. But how policy changes are implemented matters a great deal and we are months away from having any sense of that. So, we will have to monitor such developments closely, as will all other investors. More adjustments may be required. But we see no need for dramatic or sizable adjustments to our holdings right now.
The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.