The 2024 US elections have ushered in a significant shift in the political landscape, delivering a trifecta for the Republican Party. With Donald Trump reclaiming the presidency and Republicans securing majorities in both the House of Representatives and the Senate, the implications for the economy and financial markets are profound. Early reactions in the markets have been telling, with US equities, the dollar, and bond yields all experiencing upward momentum following the election results on November 5. As analysts and investors sift through the ramifications of this political shift, the focus is on understanding the short-term and medium-term economic dynamics that will shape the future.
### Short-Term Economic Dynamics
In the immediate aftermath of the election, it is crucial to recognize that President-Elect Trump will not assume office until January 20, 2025. This gap presents a unique challenge for financial markets, which often react swiftly to political developments. However, the prevailing macroeconomic conditions will likely dominate the narrative in the short term, overshadowing the incoming administration’s policies.
Current indicators suggest a cooling labor market and inflation rates trending back toward the Federal Reserve’s target of 2%. This environment is conducive to a more accommodative monetary policy, which the Fed is expected to maintain until at least mid-2025. The lagged effects of interest rate hikes implemented since 2022 may begin to exert pressure on the economy, potentially leading to a soft patch in the first half of the upcoming year. While the data to support this scenario is still developing, it remains a risk worth monitoring. In the absence of significant economic deterioration, the prevailing interest rate environment should continue to favor risk assets, providing a supportive backdrop for investors.
### Medium-Term Policy Implications
As the Republican Party regains control of Congress, the next Trump administration will likely encounter fewer obstacles in translating campaign promises into legislative action. However, the timing and impact of these proposed policies remain uncertain, complicating efforts to predict their effects on the markets. Broadly, it is anticipated that the administration’s policies will reinforce two significant global macroeconomic trends: deglobalization and rising public debt.
#### Deglobalization
One of the most pronounced trends is deglobalization, which has been gaining momentum for over a decade. President-Elect Trump has pledged to impose import tariffs on China and other trading partners, a move that would accelerate this trend. The decline in US trade openness, measured by imports as a share of GDP, has been evident across multiple administrations. The introduction of additional tariffs and trade restrictions aligns with a broader tendency to favor domestically produced goods over global imports, potentially reshaping supply chains and trade relationships.
#### Rising Public Debt
Another critical issue is the trajectory of public debt. In the wake of the COVID-19 pandemic, national government debt levels have surged, and there appears to be little appetite for reversing this trend. Trump’s intention to extend the personal income tax cuts from his first term and consider further reductions in corporate taxes could exacerbate the federal budget deficit. Without corresponding revenue measures, the demand for US government debt is likely to increase, which could exert upward pressure on global interest rates.
### Long-Term Economic Effects
Looking further ahead, the economic effects of the new administration’s policies are still uncertain. The combination of looser fiscal policy and increased tariffs could lead to a moderate rise in global inflation. However, the multi-year impact of these policies is difficult to gauge, as they may affect various sectors of the economy in different ways. For instance, Trump’s proposed reduction in immigration could have mixed outcomes. A smaller labor force might drive wages higher, benefiting workers. Conversely, a slowdown in population growth could dampen demand for housing and consumer goods, potentially leading to disinflationary pressures.
As the markets react to the election results, initial volatility is expected to subside over time. This stabilization may limit the portfolio effects for long-term investors, who are advised to adopt a measured approach. Fed Chair Jerome Powell’s guidance to “stay vigilant but don’t overreact” resonates with the current sentiment. Investors should analyze the potential economic implications of government policy changes, consider various scenarios without prematurely incorporating them into their base case, and remain prepared to adjust their strategies as the political landscape evolves.
In this complex and dynamic environment, the interplay between macroeconomic conditions and political developments will be critical in shaping the future of the US economy and financial markets. As the new administration prepares to take office, stakeholders will be closely watching for signals that could influence their investment decisions and economic outlook.
