President Elect Trump and the US Consumer

Chelsea Wiater - Senior Portfolio Manager 

Post-election stability but consumer uncertainty?

In the wake of a decisive victory on 5 November, President Elect Donald Trump has had an immediate positive effect on US equity markets. Investors appear convinced that his second term will yield higher macroeconomic growth and superior corporate outcomes. As it relates to the US consumer, however, the outlook is opaque. Trump represents a positive for consumer spending and wage growth, vis a vis personal tax cuts on the near-term horizon. The lack of political violence following the election also represents an unexpected positive. That said, the inflationary effect of tariffs and the consequences of lower tax revenues on the federal deficit are considered headwinds longer-term.

One prominent aspect of President Elect Trump's victory is the avoidance of political violence and the promotion of an orderly transition of power. By conclusively winning both the popular vote and the Electoral college, the likelihood for protest is substantially diminished. The instability immediately following the US Presidential elections in 2016 (Antifa protests) and 2020 (the storming of the US Capitol) did much to damage the delicate consumer psyche. In our opinion, the absence of unrest and societal chaos should provide consumers with a sense of security, which should in turn influence spending behavior and investment decisions in the short term.

Republican Congress control a boost to the consumer outlook

Of note, the GOP also appears poised to control both branches of Congress, which raises the likelihood that President Elect Trump can pass more substantive legislation. The benefit to US consumers is the prospect of lower taxes, a key element of the economic agenda for Republicans. This projected uptick in disposable income should stimulate consumer spending and economic growth. It could also lead to higher wages as businesses strive to attract and retain talent in a more competitive labor market. This is a salient point for many Trump voters who felt marginalized by Bidenomics. To wit, we believe lower personal tax rates should help companies that are linked to shifts in discretionary spending patterns – particularly on the lower end of the socioeconomic spectrum.

Lower corporate taxes but potential consequences

We also believe that President Elect Trump will make a push for lower corporate tax rates, building on the measures enacted in the Tax Cuts and Jobs Act of 2017. While lower corporate taxes will initially provide an economic boost, there are potential longer-term consequences that could adversely affect US consumers. These include the potential for a higher federal deficit, higher debt service costs, higher consumer borrowing rates, and a negative crowding-out effect (e.g. cutbacks) on many federal programs and institutions. In sum, while lower taxes are inevitably a positive for near-term earnings growth, the potential for a hangover-effect (e.g. recession) has been elevated.

Lastly, President Trump's trade policy in his first term was characterized by a willingness to implement tariffs on imported goods and reinstating more severe tariffs has been a cornerstone of his re-election campaign. The obvious concern is that these extreme measures (designed to protect American manufacturers and its workers) could coincide with inflationary pressures and a commensurate decrease in purchasing power. In such an environment, we would be cautious of companies with outsized dependence on offshore manufacturing, particularly in the areas of footwear and apparel where pricing power hangs in a delicate balance.

Conclusion

In sum, we believe the above reassurances to US consumers represent a near-term catalyst for spending on discretionary goods and services. Both restaurants and retailers that benefit from a comfortable shopper should enjoy demand resilience, particularly heading into the all-important Holiday spending period. Nevertheless, the inflationary effects of tariffs and an escalation in the federal deficit may pose challenges to the long-term health of the US economy. As active managers, we remain positioned to take advantage of this volatility, with an unending focus on high quality companies poised to benefit from this red wave economy.

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