WEEKLY E-MAIL

12 November 2024

HOW TRUMP’S ELECTION COULD IMPACT FINANCIAL MARKETS

By Karen Maher

Donald Trump has been elected as the 47th President of the United States, securing 312 electoral college votes to Kamala Harris’s 226. Alongside the presidential win, Republicans are on track to regain Senate control and retain the House, resulting in a ‘Red Sweep’. This outcome paves the way for Trump to implement his economic policies with fewer legislative hurdles.

How did the Share Markets react?

The stock market’s reaction to Trump’s victory this year was the most positive response to a presidential win in U.S. history.

U.S. stocks surged to a record high last week on the excitement surrounding the pro-business policies promised by Trump, including lower taxes and less regulation. The S&P 500 Index advanced 4.7%, bringing its year-to-date return to 27.2%. All sectors of the Index posted gains, particularly economically sensitive ones including consumer discretionary, energy, industrials, and financials.

Shares of smaller companies performed especially well, with small caps surging ahead by 7.0%, extending its year to-date return to 18.4%. Domestically focused companies that are heavily represented in this index would benefit from U.S. tax cuts to a greater extent than the S&P 500’s more internationally focused constituents.

These market gains coincided with an expected 25-basis-point rate cut from the Federal Reserve on Thursday.

Key Policies Under Trump – what to look out for?

Taxation

Trump aims to make the 2017 personal tax cuts permanent, retaining the 37% top marginal tax rate, while reducing the corporate tax rate from 21% to 20%, with a 15% rate for domestic manufacturers. These cuts could boost U.S. corporate profits, benefiting the stock market.

U.S. Tariffs

Trump has proposed raising tariffs to 60% on Chinese imports and 10%-20% for other countries to increase revenues and promote domestic manufacturing.

While these tariffs aim to support U.S. industries, they would also likely raise import costs for U.S. consumers, putting upward pressure on U.S. inflation levels.

Although only 4% of Australia’s exports go directly to the U.S., the Australian economy could be affected if slower Chinese growth reduces demand for key exports like iron ore, coal and agricultural products. China is one of Australia’s significant markets for these goods and reduced demand would likely lower export revenues.

Additionally, higher U.S. tariffs may raise the cost of U.S. goods imported into Australia, contributing to inflationary pressures.

Regulatory Changes

Trump plans to eliminate 10 regulations for every new one introduced, a move likely to be welcomed by sectors such as financials and anticipated to boost Merger and Acquisition (M&A) activity.

Climate and Environmental Policy

Trump is expected to reverse U.S. net-zero commitments, favouring fossil fuel support over green initiatives. Subsidies for green manufacturing may be redirected toward traditional domestic manufacturing, potentially slowing U.S. clean-energy growth.

Oil and Natural Gas Production

Trump is likely to further expand U.S. oil and natural gas production, which is already at record highs. This increase in supply may put downward pressure on global oil prices.

Immigration

Trump’s proposed immigration policies, including potential detention or deportation of up to 11 million undocumented immigrants, could lead to labour shortages in low-wage sectors, raising labour costs and contributing to U.S. inflation.

Summary

Trump’s economic policies, particularly tax cuts and deregulation, will look to boost U.S. productivity by encouraging investment. However, proposed tariffs, reduced immigration and potential labour shortages could raise inflation and limit productivity gains, impacting the U.S. economy and potentially affecting Australia’s export revenues and inflation.

However, the final measures eventually adopted could vary from those promised during the campaign so it is important to be cautious about the long-term implications of the proposed economic policies. Markets will be watching closely to see if and how the proposed policies of the new president are enacted.

Karen Maher
Associate

If you have any questions or comments, please email me at karen@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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