Looking Beyond Election Results and the Fed Rate Cut

The 2024 presidential election has concluded with Donald Trump's victory and Republican control of the Senate. This decisive outcome, coupled with the Federal Reserve's recent 25-basis-point rate cut, has triggered notable market movements: 

• S&P 500 rallied over 4.6% last week; small-cap and mid-cap outperformed large-cap stocks.
• Sectors anticipated to benefit from deregulation – consumer discretionary, industrials, technology, and financial – saw particular strength. 
• The U.S. dollar strengthened across major currencies.
• U.S. Treasury yields whipsawed: with the 10-year yield rising 16 bps to 4.42% on 11/6 and returning to pre-election levels of 4.3% following the Fed rate cut, though it may remain elevated. 

Potential policy shifts could reshape the economic landscape 

Tax Policy

• Extension of the Tax Cuts and Jobs Act (TCJA) is likely a priority, while additional tax breaks for individuals and businesses are being considered.
• With an estimated $4-5 trillion in additional deficit spending over the next decade, changes to the Inflation Reduction Act (IRA) may be proposed to offset costs.
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Figure 1: U.S. Individual and Corporate Tax Rates

Trade Policy

• A 10% border tax on all imports and potential tariffs up to 60% on Chinese imports were proposed; note that the presidential authority has more control over trade policy than tax policy.  
• The Peterson Institute for International Economics (PIIE) estimates that U.S. families could face $1,700 - $2,400 in additional annual costs.
• Estimated revenue from tariffs of $80 - $100 billion may offset only 2% of the added deficit.
• Many Trump-era tariffs continued under Biden, reflecting broader de-globalization trends – though negotiations often resulted in trade agreements, avoiding worst-case scenarios.
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Figure 2: U.S. Trade Balance by Country

Regulatory Policy

• The financial sector will likely see reduced oversight.
• The energy sector is anticipating a friendlier regulatory framework.
• Potential boost for M&A activity due to less stringent antitrust enforcement.
• The digital assets industry could benefit from a supportive regulatory stance.

Don’t fight the Fed 

The Federal Reserve has implemented its second rate cut of the fall, lowering the benchmark rate by 25 basis points to a range of 4.5% to 4.75%. This move follows September's larger 50-basis-point reduction from the 5.25-5.5% peak maintained through most of 2024.

• GDP (2.8% in Q3) is expected to slow to 2%, while inflation is approaching the Fed’s 2% target (PCE 2.1% in September). 
• A cooling labor market may be further impacted by immigration policies: only 12,000 jobs were added in October, dampened by manufacturing worker strikes and hurricanes in Florida, while the blow-out figure of 254,000 jobs added in September was revised to 223,000. 
• An additional 25-basis-point cut is possible before 2025, with market expectations for rates to eventually reach the 3-4% range.
• With the potential tension between Trump's preference for lower rates and inflationary policies, the Fed’s independence may face challenges with potential leadership changes in 2026.
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Figure 3: Federal Reserve Dot Plot

Investment Implications

Equities

• U.S. equities remain favored over international, while small-cap is positioned for outperformance. 
• However, execution risk is high, given elevated valuation (23x forward P/E vs average 17x with a ~4% rate and 17x at Trump’s first term) and earnings growth expectations (15% for next year).
• Note that during the trade conflicts in 2018-2019: domestic-facing and defensive industries such as utilities, telecom services, and real estate tended to outperform – while automobile, capital goods, and technology hardware stocks underperformed.
• Japanese equities showing strength (USD/JPY at 154), while European opportunities are more selective, primarily in financials and industrials. 
• Emerging markets, especially China, face headwinds from trade policy. 
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Figure 4: Valuation and Forward Returns

Fixed Income

• Growing fiscal deficit and debt sustainability concerns may further weaken treasury demand.
• Inflation pressures from tariffs, wages, and energy policy warrant careful duration management. 
• Attractive yields are available in the intermediate term bonds; credit fundamentals remain strong.
• Municipal bonds may face pressure from discussion on State and Local Tax (SALT) deductions. 
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Figure 5: Growing Deficit May Further Burden the Slowing Economy

A long-term perspective remains essential 

The resolution of election uncertainty and continued monetary easing has created a supportive near-term environment for risk assets. However, investors should remain mindful of elevated valuations and potential policy-driven volatility. 

The fulfillment of campaign promises, especially those related to trade and fiscal policy, will be pivotal in shaping the market’s medium-term direction. Over the long term, however, business cycles and enduring trends like technological innovation are likely to be the primary drivers of returns, as market focus shifts back to fundamental factors such as corporate performance and consumer behavior.

In this environment, a diversified strategy emphasizing quality companies, robust income generation, and prudent position sizing remains essential – as exemplified by our approach with the Farther Dynamic Asset Allocation Portfolios. We invite you to connect with your Farther advisor for any questions related to this month’s commentary.

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‍David Darby, CFA, and Alex Paul, CFA contributed to this piece.