Immigration, Deficits, and Tariffs

The new administration’s stance appears to be to boost demand via tax cuts and at the same time, ironically, to constrain supply via tariffs. At face value, tariffs have the potential to reignite inflationary pressures, which are risks to watch since they can have far reaching implications for the asset markets. Having said that, it appears more likely tariffs will be managed such that economic growth will not be impacted by having to contain inflation all over again through higher interest rates. I explain further below our thinking about tariffs.

The stock and bond markets performed well during Trump’s first term as President despite a trade war with China, frequent changes in cabinet composition, a lessening of U.S. relations with its allies and the COVID pandemic. This is one of the reasons markets have rallied around a new Trump presidency. However, it’s not 2016. We don’t expect the policies of Trump 2.0 to be the same as 1.0, and the price of stocks today is higher than it was during Trump’s first presidency. The S&P 500’s forward P/E is slightly over 22x versus just below 16x when Trump took office in 2016. Hence the market is already pricing in strong growth expectations.

Given our late-cycle economy and the time it will take for Trump’s pro-growth policies to produce impact, any growth disappointment can lead to sharp market correction in a short period of time. We manage our pro-growth stance with significant investments in more defensive sectors like healthcare and utilities for this reason (the valuation of stocks in these sectors and their growth opportunities remain compelling), as well as investments outside the US in which stock prices are more attractive. We are also reducing our overweight to stocks, as bond yields have become more attractive and we recently added a hedged position which reduces downside risk while giving healthy, but not full, upside.

Republican Party Policy Stance

Republicans are focusing on tax cuts, tariffs and deregulation.

• Tax cuts likely will be extended next year. Trump has also proposed further reducing corporate tax rates to 15% to stimulate growth.
• In the past four years, the FTC has been restrictive on M&A activity across different industries. The market expects that to change because of deregulation. As financial institutions deploy their balance sheets, credit growth should fuel economic growth. We expect to see newer technologies such as FSDs (full self-driving automobiles) and AI to have an easier pathway to approval under Trump administration in addition to a supportive regulatory backdrop for the fossil fuel industry. Construction and industrial companies (think Boeing) are likely to see continued support.
• As for tariffs, Trump prides himself on being a deal maker.  Tariffs are likely to be the negotiating tool that he uses to force other countries to comply with what he wants.  For example, the 25% tariff that he recently threatened to impose on Canadian and Mexican imports was in part an attempt to stem the influx of illegal drug fentanyl and undocumented migrants into the US. He also reached a deal before needing to institute the tariffs he threatened to impose on Colombia for not accepting migrants.

Of course, we shouldn’t ignore tariffs’ risk of reigniting inflation which would force the Fed to raise instead of cut interest rates. Trump’s immigration policies could also push inflation higher. Illegal immigration has inflated job numbers and reduced inflationary pressures more than it would have been otherwise in the service part of the economy. A Trump administration is going to clamp down on illegal immigration which can add inflationary pressures.

When it comes to inflation, we believe Trump, who promised to bring down prices during his campaign, does not want to reignite inflation and would adjust his policies if inflation trends up. Irrespective of tariffs, inflation remains a risk as the unemployment rate is low and new stimulative policies such as additional tax cuts can cause reinflation. We continue to maintain positions in segments of the market we feel are good inflation hedges such as infrastructure investments, real estate and TIPS (Treasury Inflation Protected Securities).

Impact of United States Spending

The recent so-called “money-printing” has been a global phenomenon. The ramification has been acute inflationary trends in asset valuation as well as unusual inflation spikes in goods and services post-Covid. The unusual pace of deficit accumulation stands at 6% of GDP today in a strong economic backdrop with low unemployment rate alongside policy shifts from Central Banks towards easy money. For reference, during the peak stress periods of the Great Financial Crisis and the pandemic, when revenues from taxes dwindled and costs of social safety nets surged, federal deficits ballooned to almost 10% and 15% of GDP respectively. This indicates a continuation of a trend of inflation in debt and money supply. If unabated, this may raise concerns about currency debasement.

A key strategy in one of our portfolios has been maintaining a meaningful position in the precious metal complex via exposure to physical gold and silver, as well as miners. These are desirable diversifiers for a late cycle economy where fiscal spending levels are unusually high – the deficit spending is adding to debt levels rapidly while at the same time, the Fed is embarking on an easing cycle.

Ultimately, what drives stock market gains are economic and earnings growth.  Trump’s proposed tax cuts and deregulations are perceived as pro-growth and business friendly and good for investments.  The U.S. has been growing faster than the rest of the world in the past few years due to fiscal spending and new investments facilitated by incentives like the CHIPS and Science Act and building out of artificial intelligence infrastructure.  Stability of the U.S. dollar as the world’s reserve currency is also an important factor.  Trump’s Treasury Secretary, Scott Bessent, who was the right hand to George Soros, was a pragmatic choice.  Trump has expressed a desire to keep interest rates accommodative potentially by bringing the Federal Reserve under the Executive Branch. Fed chair Jerome Powell’s term will officially end in May 2026 and Trump can’t replace him before that unless Powell himself resigns. Note: while the Fed going under the Executive Branch is unlikely, an alternative move in anchoring currency can increase market fears of currency debasements and trigger elevated volatility in bond markets.

Having experienced Trump’s first term, the market seems to have muted reactions to his rhetoric so far.  However, U.S. equity valuations are quite stretched and interest rate trajectory matters.  If coming inflation figures happen to be higher than expected, we could see selloffs in stocks and bonds.  Hence markets are likely to be volatile.

On the other hand, Trump views stock market gains as the scorecard for his term so he will be cognizant of not causing major losses.  We have used hedged positions in the past to cushion portfolio downside and would deploy them again if we see risks building up.  We also maintain meaningful allocations to defensive sectors such as healthcare, infrastructure and utilities, and the owning of precious metals and inflation-protection bonds are good hedges for inflation.  If Trump’s policies manage to extend the economic cycle, our exposure to cyclical sectors such as banks, industrials and small cap would benefit.

Let’s hope Trump’s policies, could help reduce our trade deficits and jump-start investments which would be good for our economy even if they create uncertainty. In the meantime, we will continue to monitor things closely and make changes as appropriate.

How Altfest is Positioning

Most parts of the markets we invest in should not be heavily impacted by tariffs.

We have been maintaining a pro-growth stance in our portfolio for quite some time. The new administration may provide a longer runway for the economy. We made some portfolio changes post-election, adding exposure to smaller U.S. companies (which could benefit from a protectionist agenda), mid-cap and industrial segments of the market, and reduced some of our overseas position, which still remains meaningful based on share price attractiveness.

We also increased our exposure to crypto currencies, mainly Bitcoin, within one of our portfolios. Although the U.S. dollar has a strong position versus other currencies due to stronger U.S. growth relative to the rest of the world, investors have concern about U.S. dollar’s status as a global reserve currency given high U.S. spending and debt. This together with a supportive regulatory backdrop (ETFs holding physical cryptocurrencies are allowed to launch) have boosted the appeal of bitcoin. We believe deregulation will benefit the crypto ecosystem and Bitcoin will be a primary beneficiary because of its defined roles within the conversation.

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Altfest Personal Wealth Management has been guiding clients in their investment decision-making since 1983.  Our advisors take the time with each and every client to listen and ask thoughtful questions.  This allows us to design a tailor-made custom investment and financial plan to meet your exact needs.  Want to find out how Altfest can help you?  Schedule a complimentary consultation or give us a call at (212) 406-0850.

 

 

 

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Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.