The election of Donald Trump has had a significant and immediate impact politically, both at home and abroad. There has been a reshuffling of the power structure in Washington, with Elon Musk’s stature most notably elevated. International relationships are simultaneously strengthening and fraying, and legal battle lines are being drawn domestically. However, the economic and investment impact has been more muted since November. We could highlight a few market moves that have been driven by changing political expectations, but, in general, the market has continued with the same trajectory it had going into the Presidential election. We do not want to downplay the volatility inherent in Trump’s far-reaching, and sometimes contradictory, economic agenda. But it is also important to emphasize how challenging it is for any administration to wrestle with something as large as the U.S. economy. The levers that steer this giant ship are hard to identify, to say nothing of pulling them in a well-orchestrated fashion to speed things up or slow things down. This is why markets are often so desensitized to changing political winds – the momentum of an economy so often overrides all else. And it may be more significant than any additional commentary to note that the incoming administration is inheriting a relatively healthy economy with moderating inflation.
We give credit here to the Federal Reserve for balancing the historically competing demands of curbing inflation and maintaining economic growth. Normally, the austerity required to accomplish the first goal torpedoes the second, but this time around Jerome Powell seems to have walked a careful line somewhere in between these competing endpoints. Inflation could be lower and growth could be higher, but the “Goldilocks Economy” has proven more than adequate for investors, and it continues to push the stock market gradually higher. The incoming administration has inherited these benign conditions. We are skeptical that this administration, or any other, could do much to radically redirect the economy higher, but one aspect of the economy that is still lagging is the construction market, both residential and commercial. If that could recover this year it would help the economy and some cyclical corners of the stock market that have been left out of this technology-driven rally. The construction market is obviously economically important, and it is also an interesting illustration of some of the new variables for investors.
Within his big political tent, there are many allies of Donald Trump who would push wholeheartedly for increased construction, as just one facet of a larger plan to increase economic growth. The difficulty for investors now is determining which voices to listen to within this tent. In our view, the pro-growth advocates are implicitly at odds with Trump’s campaign trail promises of mass deportations and across-the-board tariffs. The likely impact of those two policies would be increased material and labor costs for any construction project, obviously making the larger goal of more construction quite a bit more challenging. An inflationary shadow, implicit within this protectionist agenda, hangs over many other industries in a similar way. Given the equanimity of markets so far, it seems the prevailing approach is to
view some of Trump’s economic talking points as merely tools. This framing refashions much of the President’s economic agenda as a stand-in for conventional diplomacy, where the threat of action is more important than its implementation. If this is indeed the narrative that the market is adopting, it is one we can buy into for the moment. Much of Trump’s first term played out along these lines, and it is an interpretation that allows one to remain in the markets and not spin their wheels too much contemplating the mercurial elements of the President’s agenda.
However, the drumbeat of tariffs is constant now, and has been a theme ever since Trump started campaigning nearly a decade ago. The Executive Office can singlehandedly change the direction of the domestic economy, permissible under the auspices of national security, with the imposition of widespread tariffs. This would change economic decision making across the board, and we will go on record arguing it would cause damage to the economy and stock market. Despite that, this administration remains enamored with the idea and that cloud hangs over a stock market that is near an all-time high.
Current Strategy
There is an obvious tension between these two narratives. An optimistic view focuses heavily on the relative strength of the U.S. economy today, while assuming much of the agenda that could derail it is never put into effect. A pessimistic view pairs a stock market that has already made significant progress over the last two years with new storm clouds to contemplate on the horizon. Our goal now is to balance both views going forward. After several strong years of returns in the stock market, we think investors will have to take bigger risks in order to achieve potentially diminished returns. That is not a great setup and our overall allocation reflects that, with cash in reserve for better opportunities. However, it is also important to view potential new investments through a clear lens, one that is not politically cloudy. We found many great new investments on behalf of clients during Trump’s first term, all of which required situational optimism. We’re confident we can do so again.
There have been some moves in the stock market, with obvious political motivations, that are worth mentioning. As noted above, we are not interested in jumping on the carousel of politically-motivated investment thinking, but it is illuminating to simply outline some of what has transpired since November. The incoming administration is seen as favorable to cryptocurrencies, while advocating for less financial regulation, and Bitcoin and banks staged a rally in the first days after Trump got elected. Conversely, there is understandable hand-wringing among investors over the possible Congressional confirmation of Robert F. Kennedy Jr. and what that would mean for healthcare companies. Any changes to healthcare policy coming from this new administration are still vague, but this new brand of Republicanism carries a tonal shift that is more skeptical of, and possibly more antagonistic toward, the healthcare industry.
Perhaps the most significant market development with political origins since Trump’s election has occurred in the U.S. bond market. The same equanimity present in stocks is not shared by bonds, and it is fair to say that holders of longer-dated Government debt are anxious. It is far too early to try and detail Trump’s full economic ambitions and means of accomplishing them, but a rough sketch involves some mixture of tariffs and increased economic growth. Both would likely be inflationary and involve higher deficits for the foreseeable future. (We are skeptical that a Department of Government Efficiency will find meaningful spending cuts that are politically viable). More inflation and larger structural deficits would be unwelcome by bond investors, and in the months since the election, longer-dated bonds have turned lower. This pushed yields higher. If they continue to climb higher from here, that alone could be enough to sap the economy and markets. Mortgage rates are climbing back up past 7% and bond yields may be starting to put pressure on stock valuations, which are always jockeying in competition for investor dollars.
