A Trump White House: Potential Market Impacts of the US Election
Donald Trump's presidential upset has stunned financial markets, which had heavily discounted a Clinton victory. What might Trump's policy proposals mean for markets and key components of the US economy going forward? The questions outnumber the answers at this stage, but here are our best guesses.
The increased level of uncertainty could delay spending in the near term, but overall GDP growth should be faster thanks to tax cuts and infrastructure spending. Trump’s policy proposals call for an aggressive easing of fiscal policy, and we are left with questions on the distribution of tax cuts (will they favor high-income earners with low marginal propensity to consume?) and how they will be funded (up-front spending cuts or delayed cuts?). We believe the major risk of the Trump administration is a supply-side hit to the economy stemming from a potential trade war with higher tariffs and reduced supply of labor due to tougher immigration enforcement. Recession odds increase in the medium term if an initial GDP growth spurt is met with higher interest rates and followed by a negative supply-side shock. Immigration and trade restrictions increase the risk of inflation and a policy tightening error by the Federal Reserve.