By Mike Adams
There are a lot of very happy people with the election and many who are depressed. While Presidents make some changes in the economy it is profits that drive the markets, not politics. It makes sense then to look at the promises President-elect Trump made and evaluate how those promises will affect the markets and specifically the stocks we own in our portfolios.
Trump promised cutting taxes by $9 trillion. He said neither tips nor overtime would be taxed. He said he wanted to make the 2017 tax cut permanent ($4.6 trillion); remove taxes on tips ($250 billion), increase the child tax credit from $2,000 to $5,000 ($3 trillion) and eliminate taxes on social security ($1.8 trillion). If he can achieve these promises and there is a good chance he will with Republicans controlling the House and Senate, it will very probably be a significant boost to the economy, for individuals, for business profits, for stocks in general and the stocks in our portfolios.
To offset a significant part of the cost of the tax cuts Trump promised 10% to 20% tariffs on all imports and up to 60% on Chinese imports. If he implements this and it will be at his sole discretion 10% will raise $2 trillion per year. If 20% tariffs are put into effect on all imports it would raise $3+ trillion. In his previous term China did respond by cutting some prices essentially to pay part or all the tariffs. Will China do that again this time? It is possible but not probable. Trump threatened up to 100% tariffs on Mexico if that country will not close the border on their side. When Lopez Obrador (AMLO) was President of Mexico those threats seemed to be effective. The new President of Mexico Claudia Sheinbaum has already prepared to bend to the Trump threats. If Trump does institute the tariffs as he promised that action will increase inflationary pressure.
Many if not most big companies already have a plan in place to offset the impact of the tariffs that are proposed. Some have begun to raise prices; some will absorb some of the additional tariff costs by either cutting costs or taking a hit on profits. The impact on inflation may not be as recognizable as the inflation of the 2022-23 time. Trump wanted to “drill baby drill” for fossil fuel. That will keep gasoline prices down. Most food products are produced in the United States and would be unaffected by tariffs.
However, food prices and quantities may be impacted by the deportation plans of undocumented and documented workers. There are those politicians and some of their supporters who claim that the undocumented and migrant workers have displaced Americans who want those jobs. I remember the State of Washington some years ago when unemployment was high and the state government decided to restrict the number of migrant workers. The idea was to put unemployed American citizens to work food harvesting that had been done by migrants. It was a terrible idea. Very few American citizens decided to work the fields and even most of those who did performed poorly.
If the deportation removes most of the workers from the food harvesting it will mean shortages and significant price increases. That is a BIG IF, but very possible.
Federal Reserve Chairman and several other members of the Fed’s Open Market Committee have stated there is no rush to do more interest rate cuts. Is the Fed concerned that tariffs and deportations will launch a new bout of inflation? Very possibly. If it happens and we believe there is a significant chance inflation will relaunch, 2025 will be blamed on Biden but in 2026 the inflation will likely be credited to Trump.
Trump has created a new Department of Government Efficiency (DOGE) appointing Elon Musk and Vivek Ramaswamy to lead it. Musk has stated their goal is to take $2 Trillion out of the US Government spending. Total US government spending was $6.75 trillion. So, the DOGE thinks they can reduce that by 30%. Roughly 2/3 of government spending is mandated by law: social security, Medicare, Medicaid, student loans, veteran affairs, etc. The biggest discretionary portions of government spending are on defense and interest payments on US debt. Cutting mandatory expenditures will require public meetings and will face legal challenges.
In 2010 the Simpson-Bowles Commission was set to cut government spending to a level of 60% GDP by 2023. The Commission delivered their plan which would have accomplished that by reducing some healthcare costs, Social Security reforms, discretionary spending cuts and raising some taxes. Few of the proposals were ever implemented.
The DOGE will have some power in eliminating regulations. That will be positive for company profits and the stock market. If Musk and Ramaswamy are able to achieve significant government spending it will offset some of the tax cuts. But even if they are successful in cutting $2 trillion it will only offset less than 25% of the tax cuts that Trump promised.
In summary the Trump promises will probably be positive for business and the stock market in the next year or two. But in the longer-term the impact is more questionable. It will take most of 2025 and maybe into 2026 to have a better idea of how all of this plays out.
The purpose of this particular newsletter is to examine the impact of the Trump plans on business and the stock market. There is no intent to evaluate the impact on the lifestyles and culture changes that may accompany these changes. We have no control over those changes whether we agree or disagree; whether happy or depressed. What we have control over are the stocks and bonds in the portfolios.
Perhaps it is best expressed in the Serenity Prayer: “Oh God let me have the serenity to accept that which cannot be changed, the courage to change that which can be changed and, the wisdom to know one from the other”.
We believe that Presidents try to implement the promises they make during their campaigns. We evaluate our client’s stock and bond portfolios and will make adjustments to benefit from the change of administrations. If you are not a client are your advisors making changes in your portfolios?
Article Written By:
Mike Adams, President & Principal
Adams Financial Concepts LTD
1001 Fourth Ave, Suite 4330, Seattle WA 98011
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