Straight Talk

September 30, 2024

Six Things You Missed This Week

1. We broke down the election, potential policy outcomes, and possible economic and market effects.

The policy grid can be found on our website. Trade, immigration, tax policy and regulation are the candidates’ largest policy differences, which will likely produce differentiated economic impacts. For us, this is not a partisan exercise but pure risk management. Therefore, we focus on two potential scenarios–party sweeps–where one party controls the presidency and both chambers of Congress. Since control of Congress is necessary to pass any tax or spending policies proposed by the candidates, that means a sweep tends to lead to larger changes in policy.

2. Democrat sweep scenario policies include:

1. Raise taxes on corporations and individuals earning $400k or more.

2. Spend money on the “opportunity economy” through expanded low-income tax credits and subsidies for health care premiums, housing and childcare.

3. Provide additional incentives for domestic manufacturing and green energy transition, building on success of the Inflation Reduction Act.

4. Regulatory moves to rein in monopolistic practices and push the economy towards renewable energy production and consumption.

3. Republican sweep scenario policies include:

1. Permanently extend tax cuts for all individuals and eliminate taxes on Social Security.

2. Lower top corporate tax rate from 21% to 15%-20%.

3. Raise tariffs on all foreign goods by 10%.

4. Add a 60% tariff on Chinese goods.

5. Restrict immigration/increase deportation of migrants.

6. Roll back tax incentives and regulations favoring green energy/increase incentives for oil & gas production.

4. Our estimate of potential federal budget deficit effects

is that over 10 years, a democratic sweep might cut the deficit by 10%, whereas policies enabled by a Republican sweep would likely add about 10% to the deficit over the same period. Neither candidate is talking about the fact that the government is operating with growing deficits and neither offers a real plan to reverse the trend. The fact is, running on a platform that is only about spending with no plan to increase revenues is pretty unpopular with voters. Trump is trying to avoid that problem by using tariffs as the revenue source, but as we and others have noted this is a more complex move on the chess board with uncertain effects.

5. We also looked at the likely effects on the real economy (growth and inflation).

We went through each policy proposal on the candidates lists and considered the effect in some detail:

1. Democrat takeaway: Net effect of policies is a marginal effect on GDP, but a moderate increase in the inflation rate as demand is increased and supply is constrained. 1% change in inflation over 3-5 years.

2. Republican takeaway: Dramatic effect of tariffs and immigration reduce growth and increase inflation, swamping the positive impact of tax cuts. We also see about 1% higher inflation in this scenario with growth about 0.5% of GDP lower on average.

6. Both parties’ policies look inflationary and lead to higher rates, while the Democrats policies appear less favorable to equities.

We translated those growth, inflation and other effects into estimated forecast returns on cash, long-term bond yields and equities over a 3- to 5-year horizon:

1. Cash tracks inflation, and we expect that over the multi-year horizon the Fed funds rate will follow inflation higher. We expect inflation about 1% higher in both cases.

2. For Democrats, that modest increase in inflation contributes to slightly higher 10-year Treasury bond yields in our three- to five-year forecast. Under a Republican sweep, we believe yields would be a bit lower because even though inflation rises in both scenarios, we see lower GDP resulting from Republican trade and immigration policies.

3. Turning to stocks, a key component in our forecast is earnings growth. In a Democratic sweep scenario, we would expect that tighter regulations and less business-friendly policies would pressure earnings growth. In that scenario, we would expect to see P/Es go down as well as lower earnings and lower investment levels get projected into the future along with more inflation.

4. Looking at equities in the event of a Republican sweep, we believe that the drag from tariffs could be offset with friendlier policies and tax cuts. In this scenario, earnings and valuations would both hold up better than in a potential Democratic sweep.