The 2024 Election is (mostly) over - what can we expect going forward?

Raymond James CIO Larry Adam looks at how the election results may impact the economy and financial markets.

To view the full article in PDF format, see the Thoughts on the Market publication linked below.

With election day now in the rearview mirror, we have a very good idea of the results. And while we recognize that politics can be emotional, it is our job is to provide independent analysis as to how the outcome can impact the economy and the financial markets. Below we give our thoughts and insights as to what we can expect going forward. 

This election season has been through many twists and turns. But the results, for the most part, are known – former President Donald Trump decisively won a second term in the White House, winning at least 277 electoral college votes (Arizona, Nevada, and Michigan are still counting their votes) and is likely to become the first Republican candidate to win the popular vote since 2004. As for Congress, Republicans flipped the Senate, garnering at least 52 seats, with three races still too close to call. The House is still up for grabs, but the ‘betting markets’ give the Republicans a slight advantage to narrowly hold control (by as little as one vote). As a result, a surprise Republican sweep may be the outcome.

Right down to the end, this election has truly been unprecedented. Here are a few examples:

• The first sitting President to drop out since 1969.
• First time control of the White House switched three consecutive elections since 1896.
• Largest amount of money spent in election ($16 billion) in history.
• Two assassination attempts on a Presidential candidate.
• The smallest swing in polling in the final two months in at least 20 years.
• The second largest turnout of any election dating back to 1900.
• The best three-month equity performance leading into the election since 1928.
• First President to win a non-consecutive term since 1892 (Grover Cleveland).
• First Republican to win the popular vote in 20 years.

While many pundits will opine on how impactful this election will be on the economy and markets, history tells us otherwise. The outcome of the race and the policy ramifications will have a marginal impact on the economy and markets, but it is imperative to take stock in where we are currently from a fundamental perspective.

The Trump impact on our views in the near term

Now that the presidential race outcome is known, the market’s focus will shift to what Trump can get done. As he is technically a ‘lame duck’ president in his second term, he will likely act aggressively to accomplish his priorities. His immediate priorities will be as follows:

1. 1. Trade/Tariffs | Tariffs have been a key part of the Trump agenda and the negotiations should start quickly once Trump gets into office as the President can unilaterally impose tariffs via an executive order. His immediate focus will likely be on China in particular, Mexico (China’s backdoor into the U.S.) and Europe. The biggest question will be the timing and magnitude of the implementation of these tariffs. While tariffs will likely have a negative impact on both consumer spending (due to rising prices) and inflation, the headline risk may be overblown. For spending, businesses have highlighted over recent months that they are losing pricing power – so they may not be able to pass along all of the costs to consumers, which should depress the impact to the consumer. For inflation, any negative growth-related impact from tariffs should help to dampen the inflationary impact and limit the rise in prices. In addition, lower energy prices (from more U.S. production) and a stronger dollar (which makes imports less expensive) could offset some of the inflationary impacts of tariffs. Anecdotally, President Joe Biden increased tariffs on imports from China this past spring and import prices for Chinese goods prices are still deflating. This a net negative for companies that have China exposure, particularly consumer-related and industrial companies that import from China.
2. 2. Immigration | Securing the border is a top priority for Trump. Trump has promised to crack down on illegal immigration and limit legal immigration, of which he has the power to do so through executive order. The concern: less immigration could lead to higher labor costs (which are typically 70% of the costs of doing business). There is no doubt that a smaller labor supply has historically led to higher wage growth. However, in an environment of a weakening labor market (the number of job openings has fallen from 12.2M to 7.4M), a slowdown in immigration may not make as much of an impact. This could be a net negative for companies reliant on inexpensive labor, particularly in the consumer-related services companies.
3. 3. Less Regulation | Trump will look to roll back burdensome regulations. That means we should see less regulation on some key sectors, such as financials, health care and energy. This should be supportive of economic growth, boost energy production, and boost investment and M&A activity. This is a net positive for the financials, healthcare and energy sectors.

What is the outlook for the equity market, and what sectors stand to benefit?

We caution investors not to make investment decisions based on who is in the White House or the composition of Congress, as the equity market has consistently moved higher over the long-term regardless of which party is in power and if it was a unified or split Congress. The reason: fundamentals, such as the underlying strength of the economy, the direction of earnings, monetary policy and valuations are far bigger drivers of the equity market, than politics. While we are cautious in the near- term due to elevated valuations and investor over-optimism, we remain optimistic longer-term, for five key reasons:

1. 1. Rate cuts in a no-recession environment have been supportive of the equity market
2. 2. Corporate fundamentals remain on solid footing—earnings growth of ~8-10% in 2025
3. 3. Inflation remains between 2-3%, which has historically been the sweet spot for valuations
4. 4. Investors hold a record amount of cash in money market accounts
5. 5. Businesses continue to enact shareholder friendly actions such as dividends and buybacks.

Caution: while many pundits will suggest that a Trump presidency will positively or negatively impact certain industries, we would take those thoughts with a grain of salt. Yes, there are marginal impacts to select industries, but it would have to have a meaningful impact on its earnings to cause us to upgrade or downgrade our view on the sector.

• Financials | The sector would likely be the largest beneficiary of a President Trump victory as his push for deregulation would result in less M&A hurdles and looser capital requirements supporting investment banking revenue and loan growth at the banks respectively. As a result, the financials sector is on pace to post its best day since November 2022. However, a less aggressive Fed not taking interest rates lower (if inflationary pressures build) or a slowing economy would impair this economically sensitive sector.
• Small cap | A focus on domestically-sourced goods would be a benefit to small cap equities as they are more insulated from international trade wars and could be privy to further tax cuts. Deregulation would also benefit these companies. As a result, small cap equities are on pace to post their best daily performance since 2021. However, if interest rates remain higher for longer, this would pose a headwind for small caps given their debt financing needs. Given the Fed easing cycle and resurgence in small cap equity earnings, we favor small cap stocks.
• U.S. over international | from a global perspective, Trumps protectionist policies are favorable for U.S. equities relative to International with particular risk to Chinese equities given Trump's hawkish views on China. This trend has been in place throughout the last two administrations and is likely why Chinese equities trade at a significant discount. We remain ‘neutral’ on Chinese equities.
• India | The country is likely to emerge as the beneficiary in re-configured supply chains and heightened tensions between the U.S. and China. Again, this trend has been in place and a reason we continue to favor Indian equities.

The bottom line: While politics can drive headlines, fundamentals drive the equity market longer-term. And regardless of which party wins the White House, history has shown that the equity market climbs ~9% on average in the 12 months following the election. With the positive fundamental backdrop (e.g. solid economic and earnings growth), the bull market should continue and drive the equity market higher over the next 12-24 months. However, as a third year of a bull market typically sees lesser returns on average relative to yeas one and two, future gains will likely be more muted.

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Thoughts on the Market

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