Reform is coming
The MAGA sweep is a true game changer. Markets are in flux as investors scramble to come to terms with what it all means for the economy and the future prospects of individual businesses.
The Trump team will have a free hand for at least two years to implement what could be very significant structural changes within the economy. There will be no gridlock.
Not only will the MAGA crowd control the federal government, the overwhelming victory (which shockingly includes a more than 4 million vote advantage in the popular vote) translates into psychological momentum behind the agenda. The American people clearly support this.
The investment implications of the MAGA takeover, which could extend well beyond Trump’s term, are substantial. Trump’s impressive victory is broadly beneficial for stocks and will be particularly impactful in certain areas of the market that align with his policy goals.
While the news may only be a few days old, it is still important to take a long-term perspective on the opportunities ahead. If Trump and team succeed in bringing about the “greatest economic comeback in American history,” as JD Vance phrased it on election night, they will likely remain in power for some time.
Ronald Reagan and George H.W. Bush enjoyed a 12 year run—until Bill Clinton, Ross Perot and a nasty recession put an end to it in 1992. But even Clinton, their Democrat successor, extended many of the business-friendly, growth-oriented Reagan-Bush policies. Clinton was also constrained by a Republican House that was led by Newt Gingrich and then Dennis Hastert for most of his two terms.
The 1980s and 1990s were exceptional decades in which to be a stock market investor. From 12/31/1979 through 12/31/1999, the S&P 500 Index delivered an annualized compound rate of return of 19%.
To be fair, the tech crash followed almost immediately as year 2000 began. Nevertheless, it was an incredible run that was made possible by deregulation, moderate taxation, subdued inflation and technological innovation.
When American capitalism is given the opportunity by our government to flourish, it usually does.
A new political landscape
As we look at recent exit polling data, it is clear that the Democratic Party is now losing its grip on black, Hispanic, young and working class voters. These groups represent critical elements of the coalition.
As these voters peel off, the activist progressive left may only increase its dominance over the Democrats’ policy agenda. This has the potential to alienate traditional voting blocs even further and set in motion a political death spiral for the party.
Trump, meanwhile, made substantial gains in several reliably blue states, including New Jersey, New Hampshire, New Mexico, Minnesota and Virginia. If any of these states shift red in future Presidential elections, it could be quite difficult for Democrats to recover.
It is worth mentioning that little New Hampshire, with four electoral votes, could have won the election for Trump even if he had lost all three “blue wall” states (Wisconsin, Michigan and Pennsylvania). In the quirky math of the electoral college, even small states can make the difference.
A few days after the election, it may be premature to speculate about eight years of JD Vance (or another MAGA standard-bearer) as President following four years of Trump. But American political/economic cycles do tend to extend across Presidential terms.
What might shift?
We could well be at the very beginning of a long-term reorientation of American legislative, executive and diplomatic priorities. From an investment standpoint, we would highlight five key areas of focus.
(1) Taxes
Trump’s original tax cuts were at risk of expiring. These will likely be largely preserved while various other campaign promises potentially get fulfilled (no tax on tips, no tax on overtime, etc.) Corporate income taxes and capital gains taxes should trend lower rather than higher.
Tax cuts should benefit the stock market in a (more or less) across the board way. Lower corporate tax rates help earnings, while lower capital gains taxes should attract more capital to the stock market. Lower capital gains taxes along with lower personal income taxes leave investors with a greater ability to save and invest in stocks.
(2) Tariffs
Trump’s position on tariffs attracted a great deal of media attention during the election. His views run counter to current economic orthodoxy, so his critics were keen to paint them as serious threats to the health of the economy.
Trump sees tariffs as a tool for revenue generation that will create room for income tax reductions. They also function as a bargaining chip to create better conditions for American exporters and protect industries that might have national security relevance.
In our view, the potentially inflationary impact of tariffs has been wildly overstated. As Trump himself has pointed out, inflation was extremely low during his first term despite the implementation of some $80 billion per year of tariffs.
Any form of taxation can lead to higher costs, including corporate income taxes, which according to one academic study are about 50% passed through to customers in the form of higher prices.
To the extent taxing imported goods permits lower taxes elsewhere, these inflationary impacts should be offset or minimized. Analyses looking to paint tariffs in a negative light often neglect the obvious point that they can be used to fund disinflationary tax reductions in other domains.
U.S. industrial stocks led the way up on Wednesday after the election, rising approximately 4%. This was to a large extent driven by the net positive effect that tariffs are expected to have on domestic industrial production.
(3) Oil and Gas
Trump has consistently focused on cheap and abundant energy as the lynchpin for economic growth and low inflation. He has been crystal clear in his skepticism towards “green” energy policy and is keen to exploit the “liquid gold” beneath American soil.
Investors should expect policy and legislation to shift in the direction of more fossil fuel production and transportation. Liquefied Natural Gas (LNG) represents an enormous opportunity for American energy producers and infrastructure providers, including pipeline operators and their suppliers.
Even though natural gas (which replaces coal in power plants) is the primary reason U.S. carbon emissions have declined significantly over the years, the Biden administration has been extremely hostile to LNG exports. The incoming Trump administration will pursue a completely opposite approach, which will stimulate industrial activity, especially in the southeast.
Natural gas prices are as much as four times higher internationally than they are domestically. The United States has enormous natural gas reserves that are largely trapped within our borders due to deliberate policy decisions. We expect the Trump administration to pursue the LNG export opportunity aggressively.
(4) Electricity
Trump recognizes the urgent strategic need to improve and expand our domestic electric generation and transmission capability (and the role that natural gas will have to play in that, along with nuclear energy and other fuels).
The high tech economy runs on electricity, including artificial intelligence (AI). Trump has spoken many times about the urgent need to build more power plants and related infrastructure, including at the big Bitcoin 2024 conference earlier this year.
