Anytime a presidential election shifts the policy direction in Washington, D.C., it’s time to take note.
Now could be an especially eventful transition following Donald Trump’s victory and Republican sweeps of the Senate and House.
Even before the election, many Americans, about 47%, were expecting their financial situations to change over the next four years, according to a survey by the National Endowment for Financial Education. Here are some of the ways that might happen:
Some tax changes are highly likely under Trump
Trump put his imprint on tax rules during his first administration, when he helped usher in the Tax Cuts and Jobs Act of 2017. That legislation reduced tax rates, capped SALT or state and local tax deductions at $10,000 per year, nearly doubled the value of the standard deduction, eliminated the personal exemption, expanded the child care credit and more. Those and other changes also helped to simplify tax-return preparation for many people, with no more itemizing.
The legislation was scheduled to expire at the end of 2025, which would have ushered in tax brackets as high as 39.6%, compared with 37% today. It now looks nearly certain that Trump, with strong backing in the House and Senate, will work to keep the legislation largely intact.
There could be many more wrinkles, with Trump proposing changes such as making tip income and overtime pay not taxable, along with Social Security retirement income. He also has suggested making auto-loan interest deductible, and he might favor scrapping current federal tax credits of up to $7,500 for the purchase of electric vehicles.
Some of those proposals might be tough to get through Congress, especially as certain ones would encourage people to “game the system, claiming that more worker income was, in fact tips or overtime,” noted David Kelly, chief global strategist at J.P. Morgan Asset Management. Some proposals also would be costly in terms of reducing government revenue and adding to the bloated federal debt, he added.
Cutting inflation further will be tough if Trump hikes tariffs
Trump campaigned heavily to convince Americans that price levels and inflation had gotten out of hand, so easing cost-of-living burdens will be a priority for his administration. But it won’t be easy to curb inflation much below its 2.6% annual pace.
Easing regulations on businesses could help, but imposing higher tariffs on foreign imports as Trump has proposed would conflict with an inflation-fighting goal, as these taxes could be passed along by middlemen to consumers.
Another problem with higher tariffs is that they might invite foreign retaliation that could “slow the economy, reducing revenues from other areas of income taxation,” Kelly added.
Preston Caldwell, senior U.S. economist at Morningstar, predicts a 10% across-the-board tariff increase and a 60% levy on Chinese goods would reduce America’s gross domestic product by 1.9%, though he also suspects Trump’s proposals might be a negotiating ploy to extract concessions from trading partners. Regardless, tariffs are viewed almost universally among economists as bad policies, he added.
Nigel Green, CEO of the deVere Group, a global financial-advisory firm, sees many of Trump’s policies including tariffs as inflationary. “The erosion of cash’s purchasing power is a near certainty in this environment,” he said in a post-election commentary.
Inflation was lower, averaging about 1.9% annually, over the four years of Trump’s presidency compared with that of Joe Biden’s administration. But it was even lower over the preceding eight years when Democrat Barack Obama occupied the White House, averaging about 1.4% annually. Americans would be thrilled to see inflation return to either of those levels, but it won’t be easy.
The backdrop looks favorable for the stock market, so far
According to Adam Turnquist, an investment strategist at LPL Financial, the sharp Trump rally on Nov. 6 was the best one-day result following a presidential election since at least since the 1920s, with the Standard & Poors’ 500 index jumping 2.5%.
Oddly, President Biden’s victory four years earlier was the second best, at 2.2%.
That uplifting initial response to Trump’s win was a bullish omen for the stock market, with a preponderance of investors apparently expecting business conditions to improve going forward, possibly bolstered by lower taxes, including for corporations, and more lenient regulations with increased merger-and-acquisition activity.
After the nine previous times the stock market popped to the upside on the day following a presidential election, the market advanced 9.5% over the following 12 months, according to LPL Financial.
It’s way too early to tell if the favorable trend will hold, and investors will keep revamping their outlooks. However, Dave Sekera, Morningstar’s chief U.S. market strategist, cautions investors aganst getting too caught up in the recent rally. In a post-election presentation, he said he considers the stock market to be overvalued, with the exception of small companies and value stocks.
Rather, Sekera considers this an opportune time to take a close look at your overall investment allocation, especially since stocks have surged while bonds have faltered lately, and to consider making adjustments. Tweaking your mix by, say, pruning some recent big stock market winners and reinvesting the proceeds in laggard areas might be a prudent move.
“It may be a good time to lock in some profits before year-end,” Sekera said.
The election might be over, but the uncertainty won’t be.
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Reach the writer at russ.wiles@arizonarepublic.com.
