Next Chapter for US Election Story

The US post-election story is an evolving one, with many of the plot lines and key characters yet to be revealed. It will take time for markets to settle and sift through the results and their implications. As November 5 neared, markets were leaning into a Trump victory, so the election was not a repeat of 2016 when the outcome was a shock, and investors were not positioned for it. To some degree, the event risk was priced in. From here, it becomes a question of how much to reposition in response to the outcome.

Many uncertainties still remain, and the ensuing weeks will shed more light on the direction the new administration may take. The focus is now on the personnel and policies that are likely to shape the new narrative. As President-elect Trump names key leadership positions, like Treasury Secretary and US Trade Representative, we will gain important clues. Regarding policy, we continue to believe the three most important for 2025 are: trade, immigration, and fiscal policy.

Trade and Tariffs

We expect to see some trade policy shifts emerge quickly, potentially in the first or second quarter of 2025. There is a lot of uncertainty around how large tariffs might be and which countries could be levied. Although Trump has repeatedly threatened massive tariffs, particularly against China, some experts contend his rhetoric is more of a negotiation tactic. However, we generally take Trump’s comments, and more importantly those of Robert Lighthizer, Trump’s former US Trade Representative, directionally if not literally. We believe we are likely to see a significant increase in tariffs on China as well as some tariffs against the EU. The scope of tariffs could also expand to other Asian countries, including South Korea. Higher tariffs could produce a short-term bump in US inflation while also generating a headwind to global growth in 2025.

Immigration

The incoming Trump administration will likely bring a seismic shift in immigration, which may materialize as soon as early to mid-2025. Recent nominations of Stephen Miller, Thomas Homan, and Kristi Noem for key posts suggest a focus on aggressive immigration restrictions and deportations. Meanwhile, immigration has been a strong tailwind to US growth over the last two years. Some experts speculate that under Trump, immigration could drop to zero or even turn negative through restrictions and deportations, which could create a significant headwind to growth. Markets may be underestimating the potential impact. US equity investors appear to be focusing on the market-boosting effects of the Trump agenda, but there is the potential for a substantial market dislocation from tough enforcement action and constrained labor force growth. 

Fiscal Policy

As the expiration of portions of Trump’s Tax Cuts and Jobs Act (TCJA) draws near, fiscal policy will come to the forefront at the end of 2025. Hence, the economic impact may not manifest until 2026. The US could see some net new stimulus but perhaps not as much as some investors are expecting. Much of the fiscal boost is likely to come from keeping the existing tax rates in place as opposed to large, new stimulus going forward.

Growth Picture for 2025

The final factor from a growth perspective might come in the form of a modicum of relief from the removal of some election uncertainty. The reprieve could boost small business confidence, which is what we saw last time around. Additionally, expected deregulation would be positive for growth.

Putting all of this together, the 2025 growth picture for the US does not change much, in our view. However, there are more risks to the downside, depending on how aggressive the administration gets on tariffs and immigration. Potentially, any negative impact on growth could be offset somewhat in 2026 from fiscal policy.

Portfolio Implications

Looking ahead, fixed income investors will face elevated macroeconomic uncertainty. Possible policy shifts under the Trump administration are expected to heavily influence bond market performance.

Both nominal and real bond yields moved higher in the aftermath of the election. At this point, we think US 10-year Treasury yields are fairly valued to somewhat attractive. Real yields may be considered a touch high, but they are still generally compelling relative to other alternatives, such as REITs and equities. We expect Treasuries will remain range-bound for some time.

One area complicated by the election outcome is foreign currency. The US had been heading for a soft landing, and currencies revolving around global growth were expected to benefit. Now, the dollar’s surge and uncertainty around inflation and tariffs cloud the outlook for many currency trades. The expectation of ongoing Chinese stimulus may generate a positive tailwind for some growth-oriented emerging market currencies. And since nothing is likely to change for the next few months, there may be a window of opportunity where some emerging market currencies could do reasonably well. However, farther out, the potential for significant tariffs and volatility may make the case for less currency exposure and a more cautious stance.

Trump’s Mandate

Many experts posit that Trump views his decisive win as a mandate and may be compelled to move quickly on cornerstone policies around immigration, trade, and taxes. To the degree that these policies push inflation and/or the US deficit higher, budget hawks and bond vigilantes may push back—hard. There are risks that markets could remain turbulent for some time, and the US economy’s benign balance of moderating inflation and moderate growth could be tipped to the downside.