A change in US Presidency: How might it affect your finances?

Tax Cuts: What could change? 

A unified Republican government will almost certainly extend the expiring and expired provisions from the Tax Cuts and Jobs Act, as well as pursue further tax cuts, covered here: What to expect in the upcoming US election 2024. 

These and other proposals are costed at close to $7.75 trillion and are therefore very unlikely to be fully realised due to the implications for the deficit. However, we should expect a loosening in fiscal policy via tax cuts, with the scale of this sensitive to the size of Republican majorities in the House and Senate.

Tariffs: A closer look at potential impacts 

Trump has been clear that he considers tariffs an effective means of rectifying perceived trade imbalances and unfair trading practices, also saying that some of his pledged tax cuts would be paid for using tariff revenue. However, during his first term, tariffs were threatened more as a means of seeking concessions from trade partners.

It might be reasonable to expect a meaningful increase in US tariffs on Chinese imports, but one that perhaps falls short of the threatened 60% on all trade. We may see the 10-20% global tariff being used as a negotiation tool, such as on higher defence spending by European countries. In practice, this might mean tariff increases will be more product- and country-specific and implemented and removed sporadically. 

Immigration Policies: Workforce impacts 

A unified Republican Congress is likely to pass H.R 2 (Secure the Border Act of 2023), a bill passed by the House prior to the election but rejected by the then Democrat-controlled Senate. This would require employers to verify employees’ legal rights to work in the US, restricting the asylum process, and allocating further funding to extend the border wall with Mexico.

The bill is likely to result in a reduction of the undocumented workforce and a reduced flow of new arrivals into the United States. Additionally, Trump is likely to slow the pace of legal immigration significantly.

These measures stop short of a mass deportation plan which may be politically or logistically unfeasible, either way, the migrant workforce is likely to grow slower than it would otherwise be.

What will this mean for markets?   

There will always be some uncertainty about the eventual economic implications of a new presidency. On balance, we might expect higher US nominal GDP growth, however with much of the increase being realised through inflation due to potentially looser fiscal policy, increased tariffs, and lower immigration.

Interest rates may fall less rapidly than they otherwise would have done, and the Federal Reserve will continue to face difficult decisions. US bond yields are currently reflecting the expected economic environment of higher inflation alongside an increase in bond issuance, lowering the chances of the Fed becoming more ‘dovish’ in the short-term. As the US remains the benchmark for global fixed income, the broader global bond market is likely to follow, with a slower easing of rates unless downward pressure on currencies dictates a different direction.

The stimulation of growth through expansive fiscal policy and deregulation may well favour equities over bonds. All three major US indexes (S&P 500, Nasdaq and Dow Jones) surged as Trump won the election highlighting this expectation. However, excessive growth carries the risk of higher interest rates for longer and, alongside a growing deficit and immigration reforms in an already full employment economy, may eventually weigh on potential growth, the economy and stock markets.

Conclusion – What does all of this mean for you?

A new president in the White House, along with the policy change this brings, will no doubt create opportunities and threats domestically. However, as the US is also the largest global economy, it would be ill-informed to ignore how the macro-economic effects of such changes will be felt globally.

Trump’s plans will benefit some sectors whilst being detrimental to others. Growth, inflation, interest rates, and currency are all intertwined and an improvement in one factor can often be counteracted by another as foreign government policy reacts to optimise their own position. Policies that strengthen the dollar, for example, will benefit UK investors as US investment returns are converted back to pounds. Similarly, multi-national companies with significant earnings in dollars can find themselves in an equally positive position.

Whilst US markets initially responded positively and are considered to be forward-looking compared to the real economy, they have subsequently fallen back somewhat. Consequently, it might be imprudent to just consider the US a one-way bet. When creating a balanced investment portfolio, the dominance of the US market should not be ignored, but despite this, it might still be unwise to exclude other geographical regions. 

Holding a well-diversified, global basket of equities and bonds may well continue to be the answer.

If you are unsure how to manage your investments in light of the US election and would like to speak to one of our financial planning or investment specialists, fill in the form below and we will be in touch shortly.

Buzzacott Financial Planning is authorised and regulated by the Financial Conduct Authority. This article has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your circumstances before any action is taken or refrained from. The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.