The election has concluded, and the aftermath has brought about a wave of significant changes in the financial landscape. Investors around the world are closely observing the developments and their potential impacts. In this article, we will delve into the immediate investor reaction to Trump 2.0 and explore the various economic factors at play.

Unraveling the Economic Ramifications of Trump's Re-Election

Section 1: S&P 500 and Dow Jones Surge

On the very day following the election, the S&P 500 witnessed a remarkable 2.5 percent increase. This upward trajectory was mirrored by the Dow Jones Industrial Average, which soared by 3.6 percent. Such significant gains indicate a positive sentiment among investors and suggest that they have high hopes for the future under a Trump administration. The NASDAQ Composite also joined the party, gaining 2.95 percent, showcasing the broad-based nature of the market's response. Additionally, the Russell 2000 index of small company stocks surged an impressive 5.8 percent, highlighting the potential for growth in smaller enterprises.These gains can be attributed to a variety of factors. One possible reason is the anticipation of pro-business policies that a Trump administration might implement. With a Republican Congress in tow, there is a belief that these policies could stimulate economic growth and lead to increased corporate profits. Another factor could be the market's confidence in the stability and leadership provided by the Trump administration.

Section 2: Trump's Economic Policies and Their Impact

Two key Trump policies are expected to have a significant impact on the economy: low taxes and the easing of regulations in certain industries. Under the Tax Cut and Jobs Act of December 2017, individual tax cuts were enacted. However, these cuts were set to sunset at the end of 2025. During the campaign, the president-elect expressed his intention to extend these tax cuts and potentially add more tax relief in the form of excluding certain types of income from taxation, such as Social Security benefits, overtime pay, and tips.The slashing of the top tax rate on corporations from 35 to 21 percent under the TCJA was a permanent feature of the law. Extending these tax cuts would provide a boost to corporate earnings and potentially lead to increased investments and job creation. However, it also raises concerns about the nation's debt, as extending the tax cuts would add to the fiscal deficit.In addition to tax cuts, the easing of regulations in industries like energy, banking, and crypto is seen as a potential catalyst for economic growth. By reducing regulatory burdens, these industries can operate more freely and efficiently, leading to increased innovation and productivity.

Section 3: Bond Market Reactions and Tariffs

The day after the election result was in, bond prices took a hit and yields jumped. This was partially due to the deficit issue associated with extending the TCJA tax cuts. Additionally, the prospect of imposing across-the-board tariffs on imported products, a pillar of Trump's campaign, also contributed to the market volatility.Tariffs are fees imposed on imports, and while foreign nations do not directly pay them, U.S. importers such as car manufacturers, equipment makers, and construction firms have to bear the cost. These companies then face the decision of whether to absorb the extra cost or pass it on to consumers. This chain of events leads to an increase in prices for consumers, which is why economists refer to tariffs as a sales tax.The potential new tariffs could complicate the Federal Reserve's upcoming decisions. As the nation's inflation rate is heading toward the central bank's target, the impact of tariffs on prices becomes a crucial consideration. The Fed concluded a pre-scheduled policy meeting two days after the election and cut short-term rates by a quarter of a percentage point to a range of 4.50 - 4.75 percent. In their statement, officials noted that growth is solid, the labor market is easing, and there has been progress on inflation, although it still remains higher than the Fed's target.During the press conference following the decision, Chair Jerome Powell skillfully avoided answering questions about the potential impact of Trump policies on monetary policy. However, it is clear that if inflation starts to rise next year, interest rates could remain higher than currently anticipated.

Section 4: Powell's Fed Leadership and the Press Conference

There was a truly candid moment during the press conference that put an end to economic nerd-dom speculation. When Trump elevated Powell to lead the Fed in early 2018, he later criticized him for keeping interest rates too high. During the campaign, the criticism continued, although it has softened recently. This led one reporter to ask Powell whether he would resign as Fed chair early (his term ends in May 2026). In a decisive moment, Powell looked up from the reporter and into the camera and quickly responded, "No."Powell's leadership at the Fed is crucial in navigating the complex economic landscape. His ability to make decisions based on economic data and market conditions will play a significant role in shaping the future of the economy.Jill Schlesinger, CFP, a CBS News business analyst and former options trader and CIO of an investment advisory firm, welcomes comments and questions at askjill@jillonmoney.com. You can also check her website at www.jillonmoney.com.Originally Published: November 18, 2024 at 8:00 AM PST