In an election with significant implications for investors, Republican presidential candidate Donald Trump has been declared the president-elect, signaling a potential continuation and expansion of policies from his first term. As the final votes are counted and the possibility of recounts looms, the focus shifts to the implications of a second Trump administration, particularly concerning tax policies, trade tariffs and deregulation efforts. Here’s what investors should be watching.
What the Trump Victory Means for Markets
Nov 6, 2024
Discover how tax cuts, tariffs and deregulation could shape markets and impact your investments over President Trump’s second term.
Author
Monica Guerra, Head of Policy, Morgan Stanley Wealth Management
Author
Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management
Key Takeaways
- Trump’s re-election may lead to extension of his Tax Cuts and Jobs Act, likely increasing federal deficits while also supporting corporate valuation multiples.
- Proposed tariffs on Chinese goods, meanwhile, could raise inflation and weigh on U.S. economic growth.
- Deregulation in Trump’s second term could benefit sectors such as Energy, Financial Services, Pharmaceuticals and Cryptocurrency, while creating policy risks for clean energy and electric vehicles.
- Policy changes may stoke market volatility, but investors should stay focused on their long-term investment strategies and financial goals.
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1Taxes, Debts and Deficits
Changes to much of the 2017 Tax Cuts and Jobs Act (TCJA) provisions will be on the table in 2025, including, but not limited to, individual, corporate and capital gains tax rates. These could have meaningful consequences for individual investors and businesses, as well as for U.S. debt and deficits. A removal of the $10,000 cap limiting the state and local tax (SALT) deduction, for example, could add about $200 billion to the federal deficit. Republicans also have proposed decreasing the corporate income tax rate from 21% to as low as 15% and may seek to revive the 100% depreciation bonus. This would likely add further to the deficit, but may also boost corporate earnings and temporarily cause markets to rally on the news.
The expectation is that Trump will push to make the TCJA’s cuts permanent. However, any significant changes will require the approval of Congress, and the opportunity to address record-high debt and deficits could play a central role in negotiating provisions of a final tax bill. The Congressional Budget Office projects that the national debt could increase by $7.75 trillion over the next decade under Trump’s holistic policies (not just on taxes). With lawmakers likely to consider the balance between revenues and expenditures, the tax-policy changes that are eventually enacted may be more tempered than campaign-trail proposals.
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2Trade and Tariffs
In contrast to tax policy, which is dependent on congressional approval, trade and tariff policy in the U.S. can often be influenced and sometimes directly implemented by executive order. Taken together, Trump’s proposals to impose a 60% tariff on Chinese goods and potentially a universal 10% tariff may negatively impact economic growth and put upward pressure on inflation. More specifically, the measures could cause inflation to increase by 2.5% and GDP to decline by 0.5% in the two years following imposition, according to Bloomberg Economics.
Trump’s full trade agenda is still opaque, however, which provides a tail risk for investors; as such, should tariffs rise, Morgan Stanley’s Global Investment Office encourages investors to consider defensive sectors and stocks, such as Consumer Staples, Health Care, Utilities and select retailers with less exposure to offshore production.
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3Deregulation
Deregulation could be a major theme of a second Trump term. Although U.S. crude oil production is currently at a record level and additional supply could be a drag on oil prices, oil and natural gas producers are nonetheless likely to benefit from deregulation. For example, Trump is likely to lift a Biden administration pause on new natural-gas permitting approvals, accelerate approval timelines and create an easier permitting process.
Financial services could also see reduced regulatory burdens, potentially boosting the banking sector and enhancing merger-and-acquisition activity. Less stringent requirements in pharmaceuticals and biotechnology, meanwhile, could help those industries by prompting accelerated drug approvals. Additionally, cryptocurrencies and blockchain may see favorable treatment from a Trump administration and a Republican Congress, while the broader tech sector and AI policy may benefit from less federal scrutiny.
Conversely, certain sectors might face increased risks under Trump’s policies. The clean energy sector, in particular, could suffer if clean-energy tax credits are rolled back, despite their popularity in some Republican circles. The electric vehicle industry and related infrastructure might also see less federal support, impacting growth in this innovative sector.
Finally, some areas are likely to see bipartisan support. For instance, policies supporting the development and reshoring of the semiconductor industry, as well as broader national security concerns such as defense spending and cybersecurity, are expected to remain robust, driven by ongoing geopolitical tensions and the strategic need to reduce reliance on foreign critical materials.
Stay Focused on the Long Term
The re-election of Donald Trump introduces variables that could lead to short-term market volatility as new policies are implemented and existing ones are expanded or curtailed. Investors should consider the potential for short-term market fluctuations and stay focused on long-term investment strategies and financial goals. In the near term, this may include preparing for end-of-year portfolio adjustments and considering opportunities for tax-efficient investing.
As always, your Morgan Stanley Financial Advisor can help you stay informed on policy developments and their potential portfolio implications. To learn more, ask your Morgan Stanley Financial Advisor for a copy of the US Policy Pulse: The Road Ahead: 2024 Presidential Election Insights report from Morgan Stanley’s Global Investment Office.
Risk Considerations
International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.
Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.
Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias. You should always verify the results of any AI-generated output.
Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.
Virtual Currency Products (Cryptocurrencies)
Buying, selling, and transacting in Bitcoin, Ethereum or other digital assets (“Digital Assets”), and related funds and products, is highly speculative and may result in a loss of the entire investment. Risks and considerations include but are not limited to:
Digital Assets have only been in existence for a short period of time and historical trading prices for Digital Assets have been highly volatile. The price of Digital Assets could decline rapidly, and investors could lose their entire investment.
Although any Digital Asset product and its service providers have in place significant safeguards against loss, theft, destruction and inaccessibility, there is nonetheless a risk that some or all of a product’s Digital Asset could be permanently lost, stolen, destroyed or inaccessible by virtue of, among other things, the loss or theft of the “private keys” necessary to access a product’s Digital Asset.
Digital Assets may not have an established track record of credibility and trust. Further, any performance data relating to Digital Asset products may not be verifiable as pricing models are not uniform.
Disclosures
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