Economic & Market Report: 2024 Election Results – Market Impact

The election results are in.  In a stunning outcome, Donald Trump and the GOP emerged from voting on Tuesday with a resounding victory.  Since much ink has been spilled in the hours since recapping the wherefores and the whys, let’s cut right to the chase and discuss the economic and financial market implications of the GOP sweep.

Clear mandate.  The first point to highlight is arguably the most important.  Donald Trump and the GOP didn’t just win on Tuesday, they did so in decisive fashion.  Unlike in 2016 when Donald Trump squeezed out a victory despite losing the popular vote, the former and future President is on track to best his electoral vote total while also winning the popular tally by nearly 5 million votes.  Over on Capitol Hill, the GOP is also set to take control of the Senate with a handful of seats to spare in the majority.  And while the fate of the U.S. House of Representatives appeared to be tilting toward the Democrats heading into the overnight following Election Day, by Wednesday the odds had meaningfully shifted in favor of the Republicans maintaining control of the House.  Putting this all together, the GOP is all but certain to have registered a sweep.

Putting this all together, Donald Trump and the Republicans will be assuming control in January with a clear mandate to implement much of the legislation and policies they chose for at least the next two years.  And this ability to get stuff done in Washington means that the economy and financial markets will likely feel the effects.

The following are the investment portfolio implications emerging from Election Day.

Favor stocks over bonds.  The U.S. stock market rallied strongly across the board on Wednesday, but this was no surprise.  Stocks were expected to rally strongly regardless of who won on Election Day, as a major source of uncertainty was being removed by simply the voting taking place.  But the fact that the GOP sweep scenario played out means that some more lasting effects for the market are likely to continue past Thanksgiving and into the New Year.

The GOP’s clear mandate means that a bazooka of pro-growth fiscal policy is likely to be unleashed on the economy and financial markets over the coming year.  This includes increased spending, further tax cuts, reduced regulation, and more lenient antitrust oversight allowing deals to get done just to name a few.

At the same time, monetary policy should be expected to remain easy for the foreseeable future.  The Fed has already started cutting interest rates, and they are expected to continue doing so into the New Year to combat a potential economic slowdown that is now meaningfully less likely to materialize given the expected fiscal policy support mentioned above.  Moreover, it should be anticipated based on past precedence that our next President will be outspoken in pressing the Fed to keep policy easier even if they might be inclined to move otherwise.

These forces should put a meaningful tailwind behind stocks well into 2025.  While the benefits should be well received across all segments of the U.S. equity market, particular beneficiaries include mid-cap and small cap stocks, both of which have been relative laggards to large caps for some time.  While growth and value also stand to benefit, value companies with wide economic moats and sustained pricing power may be particularly well suited for the policy environment ahead.  The same might also be said for developed international stocks due to their extreme relative valuation discount to U.S. equities, although this must be evaluated in the context of the direction of the U.S. dollar in the months ahead.

As for bonds, the outlook could be relatively more challenged going forward.  Bond investors as well as the monetary policy makers at the U.S. Federal Reserve have been banking on a continued steady decline in inflation to support Fed rate cuts and lower bond yields.  But the probability of such an outcome is now experiencing a meaningful shift coming out of Tuesday’s election results.

Inflation threat rises again.  The persistent number one primary downside risk to the economy and financial markets in the form of a renewed rise in inflation has suddenly shot up the charts in probability in recent days.  Here’s why.  The U.S. economy is already strong with preliminary estimates for 2024 Q3 GDP growth coming in near 3% and projections for 2024 Q4 growth registering at 2.4% according to the Atlanta Fed GDPNow forecast.

Despite this brisk pace of expansion, the market is already getting a heaping of Fed monetary support that is now about to be supplemented by a wave of fiscal policy stimulus from the incoming Congress and administration.

At the same time, the President Elect’s most favorite word in “tariff” now stands the strong chance of being put into action with broad strokes over the coming year, with much of the resulting price increases ultimately being passed along to consumers.

These along with potential future supply chain disruptions associated with expected and still unknown shifts in the geopolitical landscape along with likely increased debt issuance at a time when the U.S. debt to GDP ratio is already well north of 100% are all forces that suggest sustainably higher prices may eventually be on offer going forward.

While many areas of the stock market, particularly those that are richly valued, would likely come under pressure from such a development, it bodes particularly ill for the bond market.

As a result, investors may be well served to strategically shorten duration in fixed income portfolios and favor higher quality corporates along with shorter dated Treasuries if such a scenario starts to unfold.

Additional opportunities.  The prospects of sustainably higher inflation under new leadership in Washington in 2025 also has broader reaching implications.  For example, the long forgotten commodities complex beyond precious metals including industrial metals and agricultural products may increasingly find themselves in favor in such a future environment, providing the more effective hedge to stocks that bonds are increasingly challenged to provide in a higher inflation environment.  Strategically and selectively focusing on the equities of natural resource producers may serve as a more effective and liquid way of gaining exposure to this area of the market for those that are interested in exploring further.

Volatility should also be anticipated to go through extended elevated bouts over the next 12-24 months.  As a result, a more specialized allocation such as managed futures at a relatively small percentage of an overall portfolio allocation may be worth consideration as an added layer of downside risk protection for model strategy.

What to watch in the weeks ahead.  Now that the election outcome has been decided, the next important step is to monitor who is set to be appointed to key cabinet positions.  Leading among these is Treasury Secretary, a position that despite all of the other Cabinet turnover was held for the entirety of Trump’s first term by Steve Mnuchin.  Other cabinet positions of interest from a market perspective include Secretaries of Commerce, Labor, Health and Human Services, and Energy.  Added wild cards to the mix for their market adjacent impacts would be Secretaries of State and Defense.  Knowing who is likely to fill these positions will go a long way in understanding the anticipated policy prescriptions that are likely to follow from these various departments.

Bottom line.  The 2024 election outcome is now in the books, and the market reaction is well underway.  While the stage is set for further stock gains as investors reallocate with a major uncertainty now removed, the same may not be said for bonds going forward.  But as events continue to unfold as we move toward a new administration and Congress, it remains as important as ever to remain dedicated to your investment discipline and long-term plan.

I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.

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