The Post-Election Economy

Donald Trump is heading back to the White House. The markets are responding in a big way, and there are several important implications for the financial markets, the macroeconomy, tax rates and even estate planning.

First off, the equity markets were up big in the first trading session after election day. All the major indices rose dramatically: Dow +3.6%, S&P 500 +2.5%, Nasdaq +3%, and Russell 2000 +5.8%. The Dow had its largest post-election advance in over a century.

It is telling that the Russell 2000 Small-Cap Index had the biggest gains of the major indices. This is likely the market pricing in the possibility of deregulation, a favorable corporate tax code, and the possibility of further Fed rate cuts which lowers borrowing costs.

Deregulation disproportionately benefits smaller publicly traded companies as the costs of complying are tougher to absorb than their large-cap counterparts. Likewise, elevated interest rates harm smaller companies as they tend to have more leverage. Lower borrowing costs, should they materialize, will be a welcome reprieve.

Considering that the Republican Party has secured majorities in the House and Senate, the stock market bump is primarily due to optimism from the pro-growth expectations of low taxes and deregulation.

The Trump Tax Cuts and Jobs Act of 2017 (TCJA) dropped the corporate tax rate down to 21% from 35%, but they are scheduled to sunset in 2025. With the Republican sweep, the TCJA has a good shot of being extended.

TCJA also doubled the lifetime estate tax exemption. Under current law, $13.61 million is exempt from gift and estate taxes for a single person ($27.22 million for married couples). But that is also scheduled to sunset.

I came across several people before the election that were being advised to amend their estate plan considering this impeding sunset. I advised against any changes until the election was over. With the election results in, it is rash to assume the lifetime exemption will sunset.

The TCJA also reduced effective income taxes for most Americans particularly because the standard deduction was doubled, helping many middle-class Americans. According to the Tax Policy Center, 90% of Americans claimed a standard deduction in 2020, but only 70% did back in 2017. Fewer Americans itemize below-the-line deductions such as mortgage interest and charitable giving. With the extension of this law and the prospect that the standard deduction will remain unchanged, more money will remain in more American pockets which is a hopeful sign for continued consumer spending.

One caution about the economy in a second Trump administration is the possibility of stricter tariffs. Tariffs place a tax on American consumers purchasing goods abroad, and it hurts domestic producers that use foreign goods or resources as an input to their product. Increased input costs could push up inflation.

Continued deficit spending which could reignite inflation is a second caution. The Trump administration ran average budget deficits of around $800 billion from 2017 through 2019 (with 2020 excluded as a spending outlier due to the crisis response to Covid-19). The President-elect is talking about significant cuts to government spending, and so we will have to wait and see.

While every administration is a bit of a mixed bag, my outlook remains positive for the next 12 months. There are enough pro-growth policies to offset anti-growth policies, and thus my outlook both before and after the election remains largely unchanged.