A lot of fast-paced changes have occurred since President Trump took office, such as tariffs recently taking effect. While politics have historically played a small role in investment performance, some investors are wondering if the magnitude of government actions will impact investments (for the better or the worse).
Realistically, the array of Trump’s policies will yield varying results. Some will benefit the markets and others will create challenges. The timing of the impacts will also vary.
Tariffs and deportations of immigrants who were working could push inflation higher. Unemployment from the firing of government workers could also weigh on the economy. However, the possibility of future tax cuts, lowering of the federal deficit, and stimulus checks could have positive impacts.
Should You Make Investment Shifts?
It’s natural for investors to question investment decisions during times of change and uncertainty. However, any action should be carefully considered. Timing the markets can be dangerous if they move in the opposite direction of your expectations. This could easily happen when you examine the array of political initiatives, many of which could have counteracting effects.
For those considering becoming more conservative, we remind investors that stocks have done well in recent years and that electing any modest reduction in stocks might be better now than at potential market lows. Conversely, we emphasize that selling stocks could reduce your long-term investment performance. Questions you need to ask yourself include:
- Can you risk lost investment return if you sell and forego potential investment growth?
- Will you have the fortitude to buy back into stocks at lower prices, which are likely when things look the bleakest?
- If you wait, might you sell at market lows, thereby locking in investment losses?
Likewise, we remind investors that becoming more aggressive should be carefully considered relative to your income needs and ability to absorb risk. Stocks recently reached all-time market highs, meaning that current buys might not be at “cheap” prices. Questions you need to ask yourself include:
- Can you risk being more aggressive if the markets drop?
- Might your income requirements force you to sell stocks at low prices if the markets decline?
- If you have high stock allocations, would you be inclined to sell at market lows? Examining your past investment decisions could be indicative.
We discuss some of the top political topics relative to potential investment impacts. These highlight the fact that there are no clearcut answers, and that short-term effects don’t necessarily extrapolate into long-term results.
International Tariffs
Tariffs were heavily discussed during Trump’s campaign with the objectives of making the U.S. more competitive, relocating manufacturing in the U.S., and strengthening national security. He recently followed through, imposing tariffs on imports from several countries, namely Canada, Mexico and China. As a result, countries are also imposing retaliatory tariffs.
Tariffs are an added tax that increase the cost of imported goods. The resulting higher cost of goods might cause an inflationary effect on many items, likely including food prices. As we saw in 2022, high inflation can have a negative impact on the investment markets.
Looking forward, the return of manufacturing to the U.S. could generate new jobs and more demand for U.S. goods, thereby stimulating the economy. We’ve already seen a shift in manufacturing and more companies sourcing goods domestically.
The interplay of a number of factors is very unknown as we rotate away from the free-trade environment that has dominated since the mid-1990’s. That said, it remains unknown whether these shifts are temporary or permanent. Trump is known for heavy-handed negotiations. Hence, there’s a chance that tariffs could be reduced or nullified.
Deportations
Deportations of illegal immigrants are underway. Some of the deportees were part of the U.S. workforce, often earning low wages. Loss of these workers will create job vacancies, particularly in the agricultural and construction sectors. Replacing vacancies in a low unemployment environment could take time. Some companies will be impacted by a temporary loss of employees (disrupting business operations), plus the cost of potentially having to pay higher wages to attract U.S. citizen employees. Again, these factors could push inflation higher.
Conversely, deportations are hoped to reduce government costs. Whether or not the benefit of any lower government burdens will trickle down to businesses and consumers is unknown.
Inflation
The two above items are distinct risks to inflation. President Trump vowed to bring prices down during his campaign, but the future is unknown. While the investment markets aren’t always correct, the bond market currently does not reflect an assumption of higher inflation. Bond interest rates have fallen since the election. That said, the outlook for inflation and the direction of interest rates could easily change course due to tariffs or other reasons. As a note, the most recent 12-month percentage change in CPI was 3% in January 2025.
Debt Levels
Our national budget deficit and debt have skyrocketed in recent years. As a result, the interest payments on our debt represent one of the largest percentage components of our national budget, now in the mid-teens. This percentage will increase under the current trajectory.
Current efforts to cut government spending are intended to reduce the budget deficit. If successful, such reductions could help to counteract inflationary pressures, possibly having a positive impact on the economy and investments. The caveats are that the impact of government changes is unknown and that the benefits could be gradual.
Elimination of Federal Funding / Employee Firings
As part of reducing government expenditures, the Trump administration is aggressively cutting Federal programs and terminating employees. As discussed above, possible cost reductions could help to reduce U.S. debt levels, which could be beneficial to the investment markets. However, an increase in unemployment in both the public and private sectors (due to loss of government contracts) could weigh on the economy.
Hence, the impact of Federal government spending cuts could have dual and opposing impacts on the economy and the investment markets.
Less Regulation
An additional objective in cutting government spending is to reduce government regulations. Many Federal regulations create costs for businesses. Fewer regulations would allow companies to rein in such costs, helping bottom line investment profits which could enhance stock performance. The timing and extent of regulatory reductions won’t be immediate but could occur in the near term.
Stimulus Checks
There is discussion of sending “DOGE dividend checks” intended to transfer government savings to taxpayers. Putting cash in consumer pockets could benefit the economy, which happened in recent years as a result of Covid-related stimulus payments. This is part of the reason why the economy and stock markets went gangbusters as we emerged from Covid.
Looking through another lens, sending checks to taxpayers would represent another form of spending, counteracting the ability to reduce debt levels. Additionally, one-time payments might only create a temporary lift to the economy.
Taxes
Republicans are in active discussions about cutting tax rates which would likely extend to individuals and businesses. Such reductions could yield a double layer of benefits for companies and stock prices.
Lower personal income taxes would generate more disposable income for consumer spending to bolster the economy. This would result in higher business gross revenues which could in turn offset company cost increases and support stock performance.
Lower corporate taxes would also help to improve corporate profits, adding an additional level of corporate cost reduction that could benefit the stock market.
On the converse, lower tax receipts (unless the economy expands by a significant degree), would hinder the country’s ability to service and paydown government debt levels.
Business Focus
One thing we do know for sure is that President Trump, and many members of his administration, come from business backgrounds. This increases the probability that the administration will keep a close pulse on the economy, inflation, corporate performance, and the investment markets.
The above points are not intended to take a political stance one way or the other. They highlight the fact that different policies and actions have the potential of generating positive or negative results. It’s unknown which will occur immediately versus gradually. Hence, it’s difficult to determine the timing of any impacts on the markets, when and if they will react, and when and if they will reverse course in one direction or the other.
SageVest’s approach to constructing portfolios and addressing these questions is tailored to you. We cohesively consider your foreseen cash needs, long-term growth requirements, and your ability to navigate risk. We invite you to contact us with questions about your investments and financial considerations looking forward.
