Financial Planning & Wealth Management

The Trump Trade

As the year winds down, many of us are looking forward to the holidays and tying up loose ends. It’s been a fantastic year in the markets, with portfolios hitting all-time highs. The US election is over and there’s at least a sense of relative calm.

 

The chart below shows the return of the US markets this year– up almost 30%. I’ve marked the election date to highlight some initial jitters, followed by a jump when the results were announced, and a continued climb since then.

A 30% return in a single calendar year might seem extraordinary, but history tells us otherwise. Over the past 100 years, there have been 18 instances where the US market gained 30% or more in a year. That’s roughly 1 in every 5 years, or 20% of the time.

 

So, why is the market running? Why did the market jump at the election result?

 

I found the below two tables illustrating the expected spending and tax plans of both the Trump and Harris campaign. This is a fascinating breakdown on their planned fiscal expenditure (how they planned to manage the US budget’s income and expenditures). It gives us clues as to what caused the markets reaction.

Source: Committee for a Responsible Federal Budget

 

Some observations:

 

  • Both candidates’ plans would have increased the US budget deficit, meaning government spending would exceed revenue.
    • Trump’s plan would widen the deficit by about $7.7 trillion, while Harris’s plan would increase it by $3.95 trillion.
  • Harris’s plan involved raising taxes on corporate income and capital gains to boost government revenue, alongside increased government spending in various sectors.
  • Trump’s plan focused on reducing taxes—both corporate and personal—leading to lower revenue collection and a significantly wider deficit.

 

In essence:

 

  • Harris: Higher taxes and higher social and targeted spending by the government.
  • Trump: Lower taxes and lower spending (though tax cuts far outweighed spending cuts, hence the larger deficit).

 

From a market perspective, the reaction to Trump’s victory makes sense. Lower taxes mean businesses retain more profits to reinvest, driving growth and innovation. Lower taxes for individuals also means more spending and saving.

 

The essence of each plan aligns with the typical divide between Democrats and Republicans philosophy on government’s role in the economy:

 

  • Democrats tend to favour a larger government role, including higher taxes and spending to fund public programs.
  • Republicans advocate for a smaller government, lower taxes, and more reliance on private sector efficiency.

 

This debate isn’t unique to the US. Here in South Africa, we contend with some of the world’s highest tax rates, raising fundamental questions about the role of government:

 

  • Should the government focus on creating jobs and reshaping industries through targeted subsidies funded by higher taxes?
  • Or should the private sector take the lead, reinvesting profits where it sees the greatest potential to spur innovation and competition?

 

It’s not my place to dictate where the government’s role should begin or end. Instead, I prefer to focus on the data, which consistently shows that markets and businesses tend to perform better when they have more control over their earnings—a trend clearly reflected in the Trump rally this past month.

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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