The presidential and U.S. Senate election results became known between the time when the U.S. financial markets closed on Tuesday November 6th and reopened Wednesday November 7th. Determining which party would control of the U.S. House of Representatives took much longer.
In the end, control of the executive and both legislative branches will be in the hands of Republicans. What does this mean for financial markets?
For starters there will be no pre-emptive taxes on capital gains, which would have produced an avalanche of artificial sales of stocks.
It also seems unlikely that the sunset provision of the estate tax exemption amount will fall, which would have also resulted in artificial liquidations of stocks due to deaths.
Additionally corporate income tax rates are unlikely to rise, meaning net income for shareholders will not be reduced.If we take a few steps back, we see a pattern that suggests tax policies are less likely to punish companies and their shareholders. When shareholders are punished this creates incentives to sell stocks.What about tariffs and the unskilled laborer pool?
Tariffs are an open question. The immediate impact would be higher prices of applicable imported goods with some offsets produced by decisions on the part of domestic companies to reverse decisions to outsource manufacturing outside U.S. borders. Additionally, tariffs will also encourage foreign manufacturers to locate manufacturing plants within U.S. borders.
As for the unskilled labor pools, it is difficult to predict the overall impact of efforts to deport more people living in America illegally, until more is known about the scale of the deportation operations. Early indications seem to point to a more immediate shift towards much stricter control of the borders coupled with the deportation of those who have committed crimes in the U.S. or who have ignored existing court orders to leave. Much of the undocumented labor force is tied to the underground cash economy in the United States. This means data points like their contributions to GDP or payroll tax flows are already EXCLUDED from the statistics and balances respectively.
What policy changes should investors watch for that would tend to produce much higher levels of GDP, booms in shareholder income, and higher revenue flows into tax coffers without an increase in inflation?The answer lies in improved energy policies and other measures that encourage greater supplies of goods and services. History is clear on the efficacy of supply-side economic policies highlighted by the assertions of great economists like Arthur Laffer and Thomas Sowell. Supply side economic policies work. If the incoming administration embraces these policies, the United States could experience an economic revival comparable to the great peace-time expansion records of the 1981-1989 period, after a major bout of inflation between 1977 and 1981.
The early signs of market anticipation are encouraging. The stock market rocketed during the second week of November, with little change in interest rates beyond a widely anticipated rate cut by the Federal Reserve.We are optimistic about the future. The overall potential for economically helpful policy changes is high.
Additionally, advances in Generative Artificial Intelligence will help drive down costs in a wide range of businesses and industries. We see upside for consumer confidence, advanced data networking demand, advanced equipment to improve computing speeds, advanced software services, and companies that are well-positioned in data gathering, analysis and cloud storage. We also see potential for exceptional niche insurance companies with dominant market positions.
Happy Thanksgiving!
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