Deficits, Tariffs, and Taxes Under Trump Administration — Evening Brief – 11.06.24
Donald Trump’s victory has triggered a seismic shift in global markets as investors brace for extraordinary policy and economic transformations under the new administration. The policy divergences between president-elect Trump and the Biden administration are considerable throughout various fronts, ensuring that the next four years will unleash significant modifications to trade, taxes and many other areas.
Initially, the incoming administration must address the federal deficit, which both candidates overlooked during the campaign. The US deficit is reaching unprecedented levels, significantly surpassing those of the pre-pandemic period. The deficit is $1.832 trillion for fiscal 2024, up $138 billion from last year, the third highest on record. Interest paid on the debt is estimated to be about 3.3% of GDP, which would be the highest since 1992.
A crucial determinant for the budget forecast is the government’s response to the expiring tax cuts enacted during Trump’s first administration, set to expire in 2025. The Tax Cuts and Jobs Act of 2017 will expire on December 31, 2025. The Congressional Budget Office forecasts that extending the tax cuts will increase the budget by $4.6 trillion over the next decade.
Secondly, import tariffs are another area with significant economic implications. Trump announced his plan to impose universal tariffs between 10% and 20% and a 60% tax on all imports from China.
“Reasonable minds can disagree on whether these proposals will become reality or just part of a broader negotiating strategy, but private estimates suggest that they [tariffs] could cost the average family $2,600,” wrote Isaac Boltansky, managing director and director of policy research at BTIG, in a note.
The bond market appears to be cognizant of these risks—tax reductions that exacerbate deficits and elevated inflation resulting from significantly increased tariffs and a burgeoning deficit.
“We need to watch what happens to bond yields, and there could be a tipping point if U.S. bond yields continue to rise,” said Seema Shah, chief global strategist for Principal Asset Management. “The bond vigilantes are out.”
Even a complete Republican Congressional victory may not grant Trump full power to implement his proposed policies. For example, Trump has expressed his desire to exempt Social Security from taxation, a measure that would substantially increase the deficit by decreasing government revenue.
“A Republican Congress is not going to bend over backward to exempt Social Security benefits or overtime pay from tax, both on the merits of those ideas, and the cost,” predicted Don Schneider, a former Republican congressional aide now at Piper Sandler. “There simply are not the votes to do that.”
For now, Trump’s victory has ignited a surge in risk assets, a sharp rally in U.S. Treasury yields, and a multi-year rally in the U.S. dollar.
“We’ve been talking about this Trump trade for a while. The fairly aggressive market reaction shows that investors didn’t know what to put on, and now they know,” Marvin Loh, senior macro strategist at State Street Global Markets, told Bloomberg TV. “A lot of us will be asking is which ones potentially have either a lot more to move or really does not yet reflect the type of administration.”
Meanwhile, other investors contend that the alarming predictions regarding the new administration’s intended policies are exaggerated. “Investors should look past the election and focus on the fundamentals of what drives markets,” said James Demmert, founder and CIO at Main Street Research.
“The economy and earnings continue to be better than expected, most stocks are reasonably priced, and the Fed is in an accommodative mode and is expected to cut interest rates again this week. There is an excellent backdrop for stocks right now,” he added.