Client Update, November 19, 2024: Post-Election Pragmatic Optimism

“But the essence of good business is knowing when to step on a train and when to step off.”

Richard Rainwater, American investor and philanthropist

So, we now have the long-awaited answer to the question that has been top of mind for so many of us for months: Donald J. Trump will be the next President of the United States.

Now the question becomes: what does this mean for the American economy?

Some economists are already doom-and-glooming: “Trump's policies could usher in stagflation and send stock prices plummeting,” suggests Business Week. As a result, some businesses are already trying to figure out how to insulate themselves from potential price shocks. “Trump’s tariff threats send U.S. companies scrambling for lobbyists and loopholes,” writes NBC News.

There is certainly an inherent tension in Trump’s victory. “Voters wanted lower prices at any cost,” The Atlantic wrote after the election. However, virtually every element of Trump’s stated economic agenda risks raising the cost of living. Focusing just on inflation expectations, will we really be better off with tariffs, protectionism, and more expensive labor in many industries as well as fiscal policies that appear to increase our national debt?

At the same time, we are reminded of Warren Buffett’s words from his 2021 letter to shareholders: “Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America.”

The Economic Impact of Tariffs

In our view, if the Trump Administration uses his tariffs selectively as a negotiating tool specifically as it relates to countries that might be unfairly flooding certain markets, like steel, or engaging in other anti-competitive practices, tariffs can be effective at leveling the playing field. So, to the extent that American companies are not operating in a fair and competitive environment due to the actions of other countries, we have no problem with using tariffs as a negotiating tool and—where appropriate—implementing them.

Here, however, we are describing using tariffs selectively, strategically, and to the least degree possible. The bigger, riskier experiment would be imposing flat 10-20% tariffs on all imports across the board. That’s where we would start to see secondary and tertiary consequences whose costs would largely be borne by American companies, who would in turn pass them on to consumers. Simply put, blanket tariffs will be inflationary, as many CEOs have pointed out on recent investor calls.

There’s another dimension here as well: at a certain point, the use of tariffs can move from being an effective tool to being a heavy-handed way to constrain the free market. It’s one thing to deploy tariffs where anticompetitive practices are hurting American businesses; it’s another entirely to arbitrarily penalize companies who have offshored capacity to achieve cost efficiencies. If the Trump Administration’s use of tariffs grows too cumbersome, the market will likely react poorly.

The Economic Impact of Mass Deportations

There’s another potential inflationary force in his proposed policies as well: the mass deportation of undocumented workers. For better or worse, these workers play a critical role in many industries. For example, as much as 45% of the agricultural labor force in the U.S. may be composed of undocumented workers, according to some studies. In the construction sector, anywhere from a third to half of the workforce will be foreign-born, with a significant portion of those undocumented, depending on where we’re counting. There is simply no way that depleting this workforce will not lead to product and service shortages and higher prices.

“If you went from 10% to 5% of a workforce, that’s one thing. But if you’re going from 50%, which it is in places like California and Texas, to a much lower share, that could have really big shocks to the housing market,” Riordan Frost, a senior research analyst at the Joint Center for Housing Studies of Harvard University, told CNN about the potential impact of deportations on the housing market.

Like it or not, the reality is that large chunks of our blue-collar economy rely on undocumented workers, most of whom are working for low wages that enable their employers to offer lower finished good prices on many products and services. In short, cheap labor keeps prices low. Losing that cheap labor will increase prices.

Fed Independence

It’s also worth noting some comments Trump made last summer about the Federal Reserve. “I feel the president should have at least a say in [Fed interest rate decisions]. I feel that strongly,” Trump said at a press conference last August. “I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman.”

It’s likely the market would react strongly to any move by the Trump Administration to undermine Fed independence, so this is not a major concern on our part. To Trump’s credit, he pays attention to market signals and indeed, backlash to his statement last summer led Trump to almost immediately tone down his comments. Still, we would view any effort by a Trump Administration to interfere in the Fed as a red flag.

The Unknowns

The true wild card is how—or even if—all of this is going to happen. Until we see how these policies are implemented and executed, everything is just speculation.

There are two dimensions to this question. The first is what policies the Trump Administration implements and how. The second is how the market reacts.

Speaking to the first point, one key question on our minds: how much of what he has said up to this point is just campaign rhetoric, how much does he really believe, and how much will survive contact with the actual policy-making process? It’s one thing to talk about significant shifts in economic policy; it’s another matter entirely to make those shifts happen.

In fact, it’s possible that, despite his strong campaign rhetoric, the Trump Administration may focus on changes that pave the way for a more favorable environment for U.S. companies. Aside from the possibility of tariffs leveling the playing field (if used well), getting more consistency around tax policy and deregulation would be healthy and good for the country, and we do expect to get more clarity around those questions.

Some degree of deregulation could also be helpful for companies. For example, the FTC under Biden tended to take a dim view of many moves that would have enabled companies to consolidate and shore up their competitive standing in the market. Increased cooperation between a Trump Administration and the private sector on tax policy and regulation would put more tools into the toolbox for businesses and give them the ability to operate with an additional level of clarity, all good things. So, if Biden’s relatively hawkish stance is relaxed under a Trump Administration, American companies could be freer to make the sort of long-term capital allocation decisions that will ultimately create value for owners.

Speaking to the second point—how the market reacts—is anyone’s guess at this point. If the Trump Administration lowers taxes for corporations and taxpayers, our government will face lower receipts. The gamble here is that any losses will be offset by more growth, improved consumer confidence and thus increased spending, etc.

The Resilience of the American Economy

Let us remember that we live in a self-corrective economic system protected by an array of guardrails. It tends to resist sudden changes; and where it can’t resist, it reacts badly. While Trump seems to have a magic touch with voters, not even he can just snap his fingers and make any random policy idea an instant reality. Plus, even if his Administration ends up making choices that fail to produce desired results, our economy has many potential levers to pull to fix things.

Ultimately, the system that, by and large, drives long-term economic performance is still in place, and rather than panicking prematurely that a Trump Administration is going to immediately “send stock prices plummeting,” we need to appreciate that fact. That democratic free market system is still working. This is partly why Buffett warned against betting against the U.S.

So, what does the market make of all this? At this point, we are watching the credit markets, especially the10 Year Treasury Rate, where the short end of curve is more influenced by the Federal Reserve. Here, we see the market’s uncertainty reflected. The 10 Year has gone up since the Fed started lowering rates. Our guess: investors perceive Trump as someone who will continue to be highly accommodative, willing to run large deficits and potentially pursue policies (tariffs, mass immigration, etc.) that could add to inflation if not executed well. I am comforted by the fact that Trump is mindful of market signals and will likely pivot away from anything that creates uncertainty and nervousness in the equity and credit markets.

Time to Panic?

No. Until we get more clarity around what’s going to happen, the door remains open to a Trump Administration taking steps that would genuinely bolster the American economy. Plus, we need to remember we’ve been here before: many people were dooming about the economic consequences of the first Trump Administration right after his surprise 2016 election. That year, pre-election analysis by Moody’s Analytics worried, “If Donald Trump were elected president and put in his stated policies, the United States would experience a lengthy recession, enormous job losses, much higher interest rates and diminished long-term growth prospects.”

Specifically, they projected that Trump’s policies would cause a 1.5% contraction in gross domestic product in 2019. In fact, it grew 2.3%. And immediately after Trump’s 2016 win, the market did dip—probably out of sheer shock and uncertainty—but then the market went on to break record after record until the pandemic hit (and the pandemic would have had virtually the same economic impact for any president).

Certainly, it is hard to say what is going to happen economically under Trump’s second presidency, and there are potential causes for concern, but it is far too soon to panic. We hold the mindset that things are never as good or never as bad as they might seem, and self-correction is built into our political and economic system.

Right now, we are taking a view of pragmatic optimism and watching closely to better understand Trump’s political nominations and policies. Indeed, we at GDS Investments will continue to scrutinize the Trump Administration’s economic activity to ensure we can continue to serve your long-term financial interests.

On Our Desk

Lastly, for another resource with a lot of spot-on thoughts about where we are and where we’re going, we cannot recommend Stanley Druckenmiller’s appearance on the In Good Company podcast with Norges Bank Investment Management strongly enough. Druckenmiller is the chairman and president of Duquesne Capital and a keen investor. He discusses his expectations for the future, including his concerns about potential upcoming inflationary triggers. Note the episode was recorded on November 5, so the election outcome had not yet been determined. Watch the interview here.

Wishing you all a very Happy Thanksgiving. As we gather with family and friends next week, let’s celebrate what bonds us and the love we have for each other and this great country!

As always, we thank you for the trust you place in us.

With warm regards,

Glenn