Now that the election dust has settled investors want to know the results for their portfolios. While it is never advisable to try to Washington proof your portfolio – markets focus on the economy, not politics, this election may have repercussions for your portfolio. The last month has been a resounding win for market participants. Stocks are up across the board. But will it last? Let's look at some of the incoming administration’s promises and the potential winners and losers.
First and foremost – taxes. A permanent extension of the tax cuts from 2017 is on the table and this will be pro-growth in the long term. In the meantime, it is expected to add to the deficit and raise inflation expectations. The U.S. budget will potentially be the loser. High income earners will potentially be winners. Corporate earnings and hence stocks will potentially be winners. Notably, tech companies and R&D intensive firms will appreciate any bonus depreciation provisions.
Tariffs could be positive for US based manufacturing, but a tariff is a cost which is added or passed on to the price of a good. Therefore, tariffs raise prices/inflation. Should there be an onshoring wave, certain U.S. manufacturers will be winners. Many producers of goods are multinational, and tariffs usually spur retaliatory actions, so the outcomes of additional tariffs are complicated and uncertain. Any increase in prices make consumers the losers.
Deregulation is pro-growth. Fewer regulations allow businesses to operate more freely and can help corporate earnings and encourage business creation and more merger and acquisition activity. Small businesses where regulatory compliance is disproportionately onerous will be potential winners. Small caps have enjoyed a boost since the election and not solely because they have been trading significantly cheaper than large caps. Small caps tend to have higher debt loads and more limited access to financing than large caps so rate cuts by The Fed are good for small caps. In addition, small caps historically do well after an election, regardless of the winner or loser. And finally small cap companies are more closely tied to the US economy with the majority of revenues sourced domestically compared to more than half of large cap revenues and the US economy is in a better position than most of the other global, developed markets. In addition to stocks (especially small caps), the U.S. economy will potentially be the winner. Bloated government regulatory agencies will be the losers.
Drill Baby Drill sure sound like a boon for energy companies but it is not that simple. Overall global demand for energy is on the rise. The latest short-term outlook from the EIA (U.S. Energy Information Administration) expects an increase of 1.2 million barrels per day (b/d)1 in global consumption of liquid fuels in 2025. Population growth as well as increased demand from tech and data companies is escalating energy needs. However, a resulting increase in supply may offset some of the enthusiasm around the energy sector. So, for now energy companies are winners based on market sentiment. Consumers will be winners if energy prices decline. In the short-term electric vehicles and renewable energy are potential losers. The long-term picture is murky.
Now that the elections are over, the market can refocus its attention back on corporate earnings where it belongs. The risk of recession remains low. The Fed is on the path to easing. Consumers are employed and still spending. Inflation is headed down. And most importantly corporate earnings are looking to achieve double digit growth in 2025.
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