Trump's policy agenda: Where the rubber meets the road

November 15, 2024 | 8 min read
Christian Floro, CFA, CMT
Market Strategist
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Trump returns, with majorities in Congress, but his agenda may face a bumpy road

Despite initial concerns that the outcome of the U.S. Presidential election might remain uncertain for days or even weeks, as dawn broke on November 6, it was apparent that Donald Trump will return to the White House as the 47th President of the United States. Surpassing his support levels from 2016 and 2020, not only did he win the electoral college, but he also won the popular vote. Notably, a GOP sweep also materialized, with the Republicans capturing a majority in both the Senate and the House.

As a candidate, Trump outlined an ambitious policy agenda focusing on trade tariffs, tightening immigration, expansive fiscal policy, deregulation, and a retooling of geopolitical structures.

The narrow Republican majority in the House suggests a challenging path for many of President-elect Trump’s initiatives requiring Congressional approval, particularly those concerning tax and spending measures. Nonetheless, with the risk of a contested election now resolved, U.S. markets have responded positively: the S&P 500 has reached new highs, and yields have risen on expectations of tax cuts and increased fiscal spending. However, policy proposals do not always translate into concrete action, making policy execution the critical focus in the coming months.

Congressional control post-election
Senate and House of Representatives

Congressional control post-election Senate and House of Representatives
Source: Associated Press, Principal Asset Management. Data as of November 13, 2024.

Tariffs

With the underlying intention of bringing manufacturing capacity back to the U.S., President-elect Trump has outlined very stringent proposals including a 60% tariff on all Chinese imports, a 200% tariff on autos from Mexico, and a universal 10% to 20% tariff on all imports. The economic impact both on the domestic U.S. economy, as well as global trade partners, from such actions would likely be sizable.

  • Weaker U.S. growth: Various estimates suggest that, in the short-term, a blanket 10% tariff on imports alone could amount to a 1% drag on U.S. GDP.
  • Weaker global growth: While costly to the U.S. economy, the resulting global growth drag would be equally significant, with negative growth impacts ranging from a low of 0.6% of GDP for the EU, to as high as 3 to 4% of GDP for Canada and Mexico.
  • China’s challenges exacerbated: At a time when its economy is already challenged by the property downturn, China is highly vulnerable to an increase in tariffs given its reliance on exports as a source of growth. Local authorities would likely be forced to deliver even more aggressive stimulus measures to offset downside risks.
  • Inflation resurgence: Estimates suggest that tariffs could result in a 0.5%-1.0% increase in U.S. inflation in the near term, depending on the extent to which countries retaliate, and whether wholesalers or retailers opt to absorb some of the tariffs in their margins. Whether the increase in inflation is sustained, however, is likely to be determined by a variety of factors, including if higher inflation expectations remain anchored and how much the U.S. dollar appreciates.
  • Policy rate path slowdown: Upside inflation and inflation expectations risks may prompt the Federal Reserve to slow its rate-cutting pace. Already, markets are pricing in fewer rate-cuts in 2025 than prior to Trump’s victory.

Whether or not all proposed tariffs become a reality remains to be determined. While the President can exercise his authority on trade unilaterally, there are some limits. A blanket tariff may face legal challenges, creating significant delays versus other proposed measures.

Overall, a rise in tariff levels will likely accelerate the speed of deglobalization but could also lead to higher inflation in the U.S. and a weaker growth outlook for China and Europe, all while emphasizing U.S. exceptionalism.

U.S. trade balance by country
Rolling 12 months, visible trade, free alongside basis

U.S. trade balance by country Rolling 12 months, visible trade, free alongside basis
Source: Clearnomics, Census Bureau, Principal Asset Management. Data as of July 31, 2024.

Immigration

Trump has proposed stricter immigration measures, including a full reversal of Biden Administration policies. His stated goal is to limit the flow of migrants, while reinstating the “remain in Mexico” policy in place during his first term in office. He has also suggested reforming the refugee and student visa renewals process, increasing border funding, and cracking down on so-called “sanctuary cities.”

Trump has also discussed the potential for mass deportations of illegal immigrants who are known criminals. While attention grabbing, these efforts are likely to be limited by funding requirements (one estimate from 2015 cited the cost of such efforts to be between $400 and $600 billion for a full-blown mass deportation) and noncompliance from blue states.

Nevertheless, the net effect of the proposed immigration policies will invariably lead to less migration overall, weighing on labor supply and the broader economy. For instance, lower labor supply could further increase inflation risk. And in the longer-term, as fewer people contribute to U.S. demand, these policies would also likely weigh on potential GDP.

Labor force participation rate
Foreign born and native born, non-seasonally adjusted, 2007–present

Labor force participation rate Foreign born and native born, non-seasonally adjusted, 2007–present
Source: Bureau of Labor Statistics, Principal Asset Management. Data as of November 1, 2024.

Taxes and spending

The 2017 Tax Cuts and Jobs Act (TCJA) expires in 2025, representing a de facto tax increase and a significant fiscal cliff risk for the U.S. economy. Extending the TCJA will likely be the most critical near-term legislative focus for the Trump administration. In addition, Trump also proposed expanding the state and local tax deduction, expanding the child tax credit, exempting tips from tax, and lowering the corporate rate to 15%.

While this expansionary fiscal agenda would likely be very positive for economic growth, in the short term, it would add to the risk of reigniting inflation.

Despite the GOP congressional majority, passing an expanded TCJA bill is likely to present significant challenges. Limited fiscal space—with the budget deficit at over 6% of GDP and interest payments a growing percentage of GDP—will be a key constraint. Indeed, bond vigilantes are likely gathering, alert to the risk of a further meaningful deterioration of the U.S. fiscal picture. The threat of elevated government borrowing crowding out private investment, with a potentially significant negative impact on economic growth, may work as a regulating force on Trump’s fiscal agenda.

The narrow House margin also creates risks that the GOP sweep may be in name only. More moderate Republicans in Congress have shown concern about the deficit impact of extending the TCJA, and they may not be inclined to support additional tax cuts, particularly on the corporate side.

Ultimately, markets should be prepared for an extension of individual tax cuts in the TCJA bill, but new and expanded tax cuts face a significantly higher hurdle. As a result, volatility and bond yields may remain elevated for some time, and if the latter is sustained, it could also be a headwind for equities.

Federal interest payments
USD billions and as % of GDP, actual values and Congressional Budget Office projections

Federal interest payments USD billions and as % of GDP, actual values and Congressional Budget Office projections
Source: Clearnomics, U.S. OMB, CBO, Bureau of Economic Analysis, Principal Asset Management. Data as of November 15, 2024.

Regulation

Markets have already seemingly front run the pro-growth impact of Trump’s deregulatory push, with cyclical sectors like Financials, Industrials, and Energy all outperforming within the S&P since November 5 amid expectations for increased M&A and investment activity, and a revival of corporate sentiment.

However, the focus for investors should be around implementation of Trump’s de-regulation policies, and personnel will be key. This time, the incoming administration appears better positioned with a full slate of strategic appointments for key political posts, making regulatory changes smoother and quicker. Additionally, the Republican majority in the Senate is expected to swiftly approve most political appointees.

Geopolitics

With two current conflicts underway, President-elect Trump’s stance on providing support to Ukraine and Israel may be a key policy difference from the outgoing Biden administration.

Trump could be less supportive of providing further funding for the war in Ukraine. Furthermore, the substantial increase in U.S. military spending in recent years, coupled with the mounting fiscal deficit, has made some in Congress question its support for Ukraine and the U.S.’ contributions to NATO without most European members paying their required shares. For Europe, the threat of fighting Russia without the military and financial strength of the U.S., and paying their required NATO dues, would likely force the region to boost its own defense capabilities, involving increased fiscal funding that it can ill afford.

From Trump’s campaign rhetoric about the conflicts that Israel is currently fighting, he has vowed to bring peace to the region – but exactly how he will set out to do that, and how much he will support Israel’s ongoing offensive against Hamas & Hezbollah remains to be seen. While bipartisan support for funding aid to Israel is unlikely to dissipate, the Trump administration will need to balance its stated desire to have a firmer hand on Iran, potentially increasing the risk of oil supply disruptions, as his Administration may press for the reimplementation of oil sanctions on Tehran.

While it remains to be seen how Trump’s foreign policy positions tangibly evolve, it’s worth remembering that aside from developments that trigger inflationary concerns, geopolitics rarely have a sustained impact on markets.

World top 10 oil producers
Calendar year 2023

World top 10 oil producers Calendar year 2023
Source: AEIA, Principal Asset Management. Data as of November 15, 2024.

Conclusion

While President-elect Trump's ability to advance his key policies faces substantial challenges, three critical factors emerge from the U.S. election results. On taxes and spending, the narrow Republican House majority and concerns over fiscal sustainability will likely act as constraints, with market pressures potentially intensifying if fiscal stimulus is seen as excessive. On tariffs, there remains a risk of slower growth and renewed inflationary pressures, which may limit the Fed’s scope for further rate cuts in 2025. However, with a soft landing as the base case, U.S. resilience suggests that the economy is better positioned to handle these potential shocks compared to the rest of the world.

Although policy uncertainty may persist into 2025, it is expected to gradually subside as Trump’s administration clarifies its policy agenda. Inflation will be a crucial variable to monitor, yet with a pro-growth policy bias in play and a solid U.S. economic foundation, despite potentially heightened and sustained market volatility, there is a strong outlook for risk assets in the quarters ahead.

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