Impact of New Administration on Economy
There’s a New Administration in Town
The flurry of unconventional activity in our government’s executive branch which began immediately after President Trump’s inauguration has dominated the flow of news ever since. Daily headlines have covered the activities of the newly created Department of Government Efficiency (DOGE), rapid-fire issuance of executive orders, and sweeping changes in various areas of national policy. The volume of unprecedented actions has understandably led to a heightened sense of uncertainty. What follows are our views on how all this could affect the economy and the markets.
Tariffs, or even the expectation of them, have significant effects on the economy and markets, creating both winners and losers. Businesses that rely on imported goods subject to tariffs face higher costs—either from paying the tariffs or by switching to alternative, non-tariffed suppliers whose prices are higher than the previous suppliers’ pre-tariff prices. These rising costs can pressure earnings and, in turn, stock prices. Some businesses may pass part of these costs on to consumers, leading to higher final prices, which can dampen demand and increase consumer inflation. On the other hand, domestic goods may appear cheaper compared with foreign goods after the tariff on non-U.S. products. This could boost sales and profits if domestic products benefit from lower prices in comparison. However, the overall economic burden of higher costs is typically more widespread than the benefits enjoyed by a few protected industries. Ultimately, tariffs will lead to consumers and businesses paying more for imported goods or domestic alternatives, while domestic producers of competing goods may gain a temporary advantage.
Tax changes also affect the economy and the markets. The tax cuts that President Trump put in place during his first administration are set to expire at the end of this year. The current administration is seeking to extend those cuts and to lower other taxes. While reducing taxes is favorable for markets, without offsets from reduced government spending, lower taxes would accelerate the growth of our budget deficit which would tend to have negative effects on the economy over the long term.
DOGE is tasked with finding ways to reduce wasteful spending. Some of its highest-profile actions have been aimed at making deep cuts to the government’s workforce. According to the Office of Management and Budget, compensation for the government’s entire 2.3-million-member civilian workforce was $271 billion in 2022, or about 4 percent of the entire budget. While it makes intuitive sense for cost cutters to look at personnel costs, legal challenges to the wholesale dismissals are mounting, so the net effect of these efforts on spending is uncertain. Eliminating entire agencies with large budgets would also impact spending, though the resulting loss of services could have longer-term negative impacts on the economy, and therefore the markets.
Other areas of the administration’s focus include foreign policy changes leading to reductions in military assistance and other aid programs with annual expenditures in the tens of billions. Additional restructuring initiatives include aligning independent agencies under the authority of the White House, removing non-partisan inspectors general tasked with keeping watch for fraud and wasteful spending. Numerous legal challenges will slow down and may permanently block some of the new administration’s actions, and this adds uncertainty as the final outcomes are as of yet unknown. In any case, market and economic effects of such changes are not likely to manifest immediately, as virtually anything the federal government does takes months or even years for the full impacts to materialize.
Meanwhile, we have recently seen the market broaden and foreign equities outperform domestic equities, which is favorable to relative performance for our approach to diversification. For most of our clients, we sense no immediate need to make major changes to your asset allocations, as we consider the constant possibility of unexpected events when working with you to establish your allocation in the first place. The more likely rationale for us to advise you to change your allocation would be related to changes in your personal circumstances or outlook. You can be assured your investment management team is diligently monitoring the intense news flow, keeping watch for the things most likely to impact our clients. Thank you for placing your trust and confidence in us, and as always, feel free to reach out to your portfolio manager with questions or comments.
