The 2024 US election was fueled by several extraordinary events leading up to November 5 that ultimately culminated in Donald Trump securing a historic comeback as the 47th President of the United States. This landmark election saw Trump not only reclaim the White House for Republicans, winning both the Electoral College and the popular vote, but he also led his party to a decisive victory in the Senate. The House of Representatives majority is not yet decided as of this writing, but Republicans are in the lead with 211 seats to the Democrats’ 199 seats (218 are needed for a majority). All of this marks a significant shift in the political landscape.
In the wake of Trump’s victory, the bond market quickly stabilized. This was in stark contrast to Trump’s surprise win in 2016 that saw the benchmark 10-year US Treasury (UST) note yield jump from around 1.85% before the election to over 2.30% shortly after the results were announced. This time around, however, because Trump was actually favored to win in the final days of the race, the US bond market reacted with a brief bump on Election Day—the 10-year UST yield rose by approximately 20 basis points, reaching 4.47%—as investors swiftly adjusted their positions in response to the election outcome. However, the 10-year then settled right back down to close on November 7 with a yield of 4.31%.
The positive market sentiment can be attributed to expectations that a new Trump administration would be pro-US business, advocating for lower taxes, more protectionist trade policies and reduced government regulations. These policies have the potential to stimulate economic growth and domestic business investment in the short term. However, it is important to recognize that such policies may also lead to higher inflation and an increased deficit.
In our comprehensive 2024 election guide "Ballots, Bonds & Beyond," released earlier this year, Western Asset conducted an in-depth analysis of the potential market-wide impacts of the 2024 global election cycle. Now that the US results are in and a Republican-dominated government is set to take office, we wanted to present a concise overview of the macroeconomic shifts we’re anticipating and our view of the sector-specific implications under the incoming administration.
Monetary Policy and the Federal Reserve
As widely discussed in the news, we also expect the newly appointed Trump administration to seek more influence over Federal Reserve (Fed) decisions. While Fed independence would likely be upheld if challenged, any uncertainty could lead to increased interest-rate volatility. We expect the Fed to maintain its data-dependent approach, but it may need to adjust its policies in response to potential fiscal stimulus and inflation concerns under Trump’s administration.
Tax Policy
The Trump campaign has proposed extending the individual tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that are set to expire in 2025. There are also indications of intentions to further lower corporate income taxes. While these measures could stimulate near-term growth, they would be costly—with estimates suggesting a $4.6 trillion impact over 10 years without corresponding spending cuts or revenue increases.
Trade and International Relations
Trump has advocated for a broader and more aggressive protectionist stance, particularly toward China. Proposals include a 60% tariff increase on Chinese imports and revoking China’s most-favored-nation status. Additionally, there’s discussion of a 10% tariff on nearly all imported goods. These policies could significantly disrupt global trade relationships and potentially lead to retaliatory actions from trading partners.
Such aggressive trade measures could destabilize financial markets, hinder economic growth, and raise concerns about global recession and inflationary consequences. However, the impact may be somewhat tempered as governments and corporations have developed contingency plans based on experiences from Trump’s previous term.
Regulatory Environment
Given the Republican sweep, we expect that we’ll likely see efforts to reduce regulatory burdens across multiple sectors, including energy, finance and health care. Environmental regulations may be rolled back. This deregulatory approach aims to stimulate economic growth and could potentially have a positive impact on near-term operating margins for businesses in a lower-cost environment.
Sector-Specific Impacts
- Banking: Under the newly appointed red-wave administration, investors could expect a more friendly regulatory environment and potential easing of stringent regulations, which could lead to spread compression. As such, we expect the banking sector to benefit from the Republican administration, particularly regional banks.
- Energy: We expect the Trump administration may incentivize more domestic energy production, benefiting midstream enterprises through permitting reform and potentially reversing liquefied natural gas (LNG) export bans.
- Health Care & Pharmaceuticals: As a result of the red sweep, there’s an anticipated deregulatory impulse that could benefit pharmaceutical companies. However, health care providers could face potential headwinds from reduced government funding and increased scrutiny if subject to any oversight by Robert F. Kennedy, Jr.
- Telecommunications & Media: A Trump administration is expected to be more favorable for TV and radio broadcasting companies, potentially providing pathways for M&A opportunities, deregulation and reduced corporate tax rates.
Market Implications
Based on historical patterns, we expect that this Republican sweep could lead to tightening credit spreads, particularly if the administration focuses on deregulation and tax reform. However, if the focus shifts to more controversial areas like trade and tariffs, it could lead to wider spreads due to increased economic uncertainty.
To sum up, while Trump’s new administration may bring significant changes to economic policies and overall market dynamics, it’s important to remember that both practical and political constraints can hinder the actual implementation of policies. Investors should remain vigilant and adaptable, focusing on long-term strategies that can help navigate potential short-term volatilities while seeking to capitalize on emerging opportunities in the evolving economic landscape.