Juncture Wealth Strategies - November 2024 Market Update

Proposal #1 – Extend the Tax Cuts and Jobs Act (TCJA) for Households

In effect since 2018, the TCJA is the current tax law. Many of its provisions are set to expire in 2025. President-elect Trump has proposed making this Act permanent which includes exclusions for tip income and Social Security benefits. Making the Act permanent most likely won’t stimulate the economy too much since it is the current law. The chart below shows how numbers will mainly be negative for the next 10 years. However, it does provide some benefits to businesses (discussed next).

 

Proposal #2 – Corporate Taxes

The tax proposal most beneficial to the economy is the reduction in the corporate tax rate from 21 to 15 percent. This rate would make the US one of the lowest corporate tax jurisdictions in the world and should create a positive fiscal impact as companies deploy those funds in other US investments. Additionally, the proposal allows for the three deductions (below) which can be very impactful for certain industries. For example, the amortization of research and experimentation costs currently are amortized over five-year period whereas the Trump proposal allows for it to be expensed in one year. This can help reduce a company’s taxable income (less taxes) freeing up additional funds to be reinvested or distributed.

Proposal #3 - Trade Policy Trump and his team have expressed their desire to use tariffs to incent companies to move their manufacturing to the US. He proposes charging a 60 percent tariff on all Chinese goods and applying a 10 percent blanket tariff on all other countries. Tariffs generally increase inflation temporarily companies that pay tariffs will increase prices to customers. Alternatively (and unlikely), companies could leave prices level resulting in decreased margins. Assuming tariffs’ cost is passed on to the consumer, the Peterson Institute for International Economics estimates annual inflation could increase by 0.8 percent. What does this mean to US consumers? The average middle-income household could spend an extra $2,600 annually due to tariffs. This could have a contractionary impact on economic growth in the short run.

Proposal #4 - Immigration Policy Trump's immigration policies may significantly affect the economy. After he announced his intent to pursue mass deportations of undocumented immigrants the Center of American Progress estimated that the US has approximately 11.3 million undocumented immigrants, 7 million of them actively working. The Pew Research Center created similar estimates: 11 million undocumented immigrants (as of 2022) and 8.3 million workers.   Certain economic sectors employ the largest number of undocumented immigrants with an estimated 41 percent of agriculture workers and 14 percent of construction workers being undocumented. Overall, undocumented workers comprise 4.8 percent of the US workforce in 2022. Mass deportations could cause significant labor shortages which, combined with lower consumer spending, could shrink the economy by approximately $1.1 to $1.7 trillion over the next 10 years. Details matter in this case. It may take many years to implement, or it could be done quickly. Both have very different economic consequences.

Proposal #5 – Government Efficiency

President-elect Trump has proposed creating the Department of Government Efficiency which would target and minimize excess costs while increasing accountability. While very few details about this new department have been released, Vivek Ramaswamy and Elon Musk have been appointed as co-department heads. Elon Musk indicated his goal of cutting approximately $2 trillion from the federal budget. For context, the federal government spends approximately $6.75 trillion per year. We assume that the federal government will increase its investment in technology to streamline many processes and departments while reducing the number of employees. The timing and implementation details will dictate its impact on the overall economy. While the economy may experience some short-term adjustment costs as laid-off workers find work in the private sector, more efficient government will likely benefit the economy over the long term.

Potential Economic Impacts: Deficits

Lower tax rates are stimulative to the economy as they encourage businesses and households to save, invest and spend those dollars on other priorities. How much this stimulates the economy will depend on timing and implementation. One consideration is that these deficits need to be financed by selling additional Treasury debt to investors. How much more debt can the US accumulate before the bond markets begin to require prohibitively high returns? No one knows. If the US dollar remains the world’s reserve currency, the US should be able to finance these additional deficits. At this time, President-elect Trump nor his team have provided specific proposals to cut federal spending.

Potential Economic Impacts: Inflation and Unemployment

In terms of inflation and unemployment, tariffs may cause short-term inflation in 2025 while causing unemployment to increase, particularly in trade-related industries. It is projected that inflation will continue to decline in 2026 - 2029 while unemployment settles back into the 4.0 - 4.5 percent range. The charts below provide Wells Fargo Economics’ opinion as to possible paths for inflation and unemployment under different tariff scenarios.

Potential Economic Impacts: Interest Rates

With expectations of stronger economic growth, investors have begun to reassess their interest rate forecasts. Earlier this year, investors expected rates to be reduced to 3.00 percent. After Trump’s victory, those odds were revised. As shown below, most investors expect rates to decline to the 3.50 – 4.00 percent range. Stronger economic growth, higher tariffs and shrinking labor supply may reignite inflation which will force the Federal Reserve to hold interest rates at a higher level than previously expected.

Possible Economic Impacts: Implementation

It is important to understand that economic proposals are easy to create but may be difficult to implement. Trump’s policies are generally viewed as pro-growth. The table below provides the impact of his economic proposals relative to current policies. For example, his policies may contribute another 0.3 percent to GDP growth by 2034 while adding 10.1 percent to the federal debt. His immigration policies may shrink the available workforce contributing to higher wage inflation while tariffs may hinder the trade sector. The timing and implementation details of each policy will be important to determine their effect on the financial markets and economy. Due to lack of details, we consider the outcomes highly uncertain. It is assumed that President-elect Trump and his team will provide additional information on his proposals over the next few months. As those details become available, we will update our opinions.

	JWS Prediction
Equities	Second tier large cap US stocks should outperform relative to international/emerging market and small-cap companies. Equities which have risen due to Trump’s victory may experience a correction once policy implementation begins.
Fixed Income	High credit, long duration, fixed rate to outperform. Lower short-term yields should continue to decline while long-term yields may stabilize as investors price in higher economic growth.
Real Assets	Commodities may begin to offer better returns once global economy begins to accelerate. Real Estate may perform in line with the overall equity market as short term rates fall, but the yield curve steepens.
GDP Growth	GDP growth is expected to strengthen from 0.9% in fourth quarter 2024 to 2.0% by fourth quarter 2025.
Inflation	Inflation continues to slow to the Fed range of 2% - 3%. It may begin to increase if tariffs and deportations begin in earnest.
Interest Rates	Interest rates will continue to decline but not as much as previously expected.
Geopolitics	Russia/Ukraine war continues as Europe takes the leadership role in providing military, financial and humanitarian aid. Europe’s military production increases significantly. Iran/Israel conflict stabilizes with possible cessation of hostilities.

Sources

1. The Pew Research Center, https://www.pewresearch.org/short-reads/2024/07/22/what-we-know-about-unauthorized- immigrants-living-in-the-us/
2. Center For Migration Studies, https://cmsny.org/importance-of-immigrant-labor-to-us- economy/#:~:text=Undocumented%20immigrants%20also%20paid%20%2425.7,growth%20of%20the%20overall%20ec onomy.

1. Economic Studies at Brookings, “Effects of Income Tax Changes on Economic Growth”
2. The Conference Board, https://www.conference-board.org/research/us-forecast
3. Tax Foundation, https://taxfoundation.org/data/all/state/combined-federal-state-corporate-tax-rates-2022/

1. Peter G. Peterson Foundation, https://www.pgpf.org/blog/2023/04/six-charts-that-show-how-low-corporate-tax- revenues-are-in-the-united-states-right-now

1. Alpine Macro, “Trump Trade, Fed Policy and Investment Strategy”, November 11, 2024.
2. CNBC,   https://www.cnbc.com/2024/11/10/trumps-mass-deportation-plan-immigrant-workers-and-economy.html

1. Peterson Institute for International Economics, https://www.piie.com/research/piie-charts/2024/trumps-bigger-tariff- proposals-would-cost-typical-american-household-over
2. Budget Model, Wharton, University of Pennsylvania, https://budgetmodel.wharton.upenn.edu/issues/2024/5/22/effects-of-permanently-extending-tcja-expiring-provisions
3. Budget Model, Wharton, University of Pennsylvania, https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024

1. Wells Fargo Economics, Wells Fargo - The 2024 U.S. Elections: Economic Implications

US Treasury Fiscal Data, https://fiscaldata.treasury.gov/americas-finance-guide/federal- spending/#:~:text=The%20federal%20government%20spent%20%246.75,the%20United%20States%20that%20year