Elections and politics are difficult topics. Give 10 people one political topic, and you will likely get at least 15 opinions…or more.
There were many reasons you chose one candidate over the other. Our goal as investment advisors is simply to review the result through the very narrow prism of the market, i.e., the collective view of investors.
Last month, the Dow and the S&P 500 Index recorded their best gains of the year. The Dow and S&P 500 ended the month at a new high, while the small-cap Russell 2000 Index eclipsed its prior November 2021 high late last month.
We believe there are two primary reasons for November’s broad-based rally…
First, the election was not contested. Second, Donald Trump is seen by the collective view of investors as the leader who will best foster a business-friendly environment.
Investors are optimistic that Trump will swiftly embrace deregulation and extend or make permanent the tax reforms from 2017, specifically the Tax Cuts and Jobs Act (TCJA), whose benefits for individuals are set to expire at the end of 2025.
He has expressed a desire to eliminate taxes on tips, overtime pay, and Social Security benefits. Additionally, he has proposed reducing the corporate tax rate from 21% to 15% for domestically produced goods.
It is an ambitious economic agenda that may not easily sail through a Congress that narrowly favors the Republican party.
Competing ideas may surface when negotiations get underway…
but the current consensus favors an extension of the TCJA. Coupled with deregulation and today’s 21% corporate tax rate (candidate Kamala Harris had proposed raising the rate to 28%), investors fueled a strong rally last month.
How does a 21% corporate rate benefit investors?
To paraphrase Warren Buffett: Prior to 2018, a corporate tax rate of 35% meant that 65 cents of every dollar of profit accrued to investors, while the remaining 35 cents went to the federal government. With the tax rate reduction to 21%, 79 cents now accrues to investors. In other words, the lower tax rate has increased earnings, which is a significant factor for stock prices.
Yet, might negotiations alter the TCJA? Will Republican deficit hawks force more incremental changes to the tax code? It’s unclear at this early stage.
While his tax proposals are viewed favorably by most investors, proposed tariffs are being met with skepticism. Tariffs create uncertainty, as his promise to enact sweeping levies runs the risk of raising prices at home and inviting offended nations to retaliate against U.S. exporters.
As December begins, investors are focusing on the pro-business agenda, while potential tariffs are currently taking a back seat amid bullish sentiment that has pushed the major indexes to dizzying heights.
Today, stocks are seemingly priced for perfection. Investors who have maintained a diversified exposure to equities have benefited. Still, any unexpected disappointment could create conditions for a market pullback.
December 2024
