Jill On Money: Market reaction to Trump 2.0

Now that the election is done, investors responded favorably to Trump 2.0 right away. The Russell 2000 index of small company stocks jumped 5.8%, the NASDAQ Composite gained 2.95%, the Dow Jones Industrial Average increased 3.6%, and the S&P 500 increased 2.5 percent on the day following the election.

The short answer is that a Trump administration should be able to implement measures that will stimulate a fresh wave of economic expansion in conjunction with a Republican Congress.

Trump has two plans that could boost the economy: lowering taxes and loosening regulations in sectors like banking, cryptocurrency, and energy. Regarding taxes, the individual tax cuts implemented under the Tax Cut and Jobs Act (TCJA) of December 2017 of the Trump Administration were scheduled to expire at the end of 2025, or return to their pre-enactment levels.

The president-elect stated throughout the campaign that he would give priority to continuing those tax cuts and that he would seek to bring more tax relief by exempting specific forms of income from taxes, such as gratuities, overtime compensation, and Social Security payments. (The top corporate tax rate was lowered from 35 to 21 percent by the TCJA, although these reductions were a permanent aspect of the legislation.)

The nation’s debt would increase if the TCJA tax cuts were extended, which could be one of the reasons why bond investors appeared less satisfied with the election’s result. Bond prices plummeted and rates spiked the day after the results were announced, partly due to the deficit problem and partly because Trump’s campaign platform included universal tariffs on imports.

Tariffs are levied on imports, but foreign countries do not pay them; instead, U.S. importers, such as automakers, equipment manufacturers, and construction companies, are required to do so.

These businesses must then decide whether to absorb the additional expense or pass it on to customers. Economists refer to tariffs as a sales tax on consumers because of this series of events. (This explains why the small stock index, which is made up of numerous domestic producers, spearheaded the post-election surge.)

As the country’s inflation rate approaches the central bank’s target, possible new tariffs could make the Fed’s next decisions more difficult. Two days after the election, the Fed ended a prearranged policy meeting and lowered short-term rates by a quarter of a percentage point, to a range of 4.50 to 4.75%. Officials added in the statement that inflation has improved, but it is still higher than the Fed’s target, growth is strong, and the labor market is cooling.

Chair Jerome Powell skillfully avoided responding to inquiries regarding the possible effects of Trump policies on monetary policy during the news conference that followed the ruling. To put it plainly, however, interest rates may continue to be higher than currently projected if inflation begins to spike up the next year.

The press conference ended the economic nerd-dom speculating with a delightfully frank moment. The backstory is that when Powell was promoted to head the Fed in early 2018, Trump disparaged him for maintaining excessively high interest rates.

Trump maintained the criticism throughout the campaign, although he has now softened. Because of all of this, a reporter asked Powell if he would step down as Fed chair before his tenure ends in May 2026. Powell rapidly responded, “No,” looking up from the reporter and into the camera in what suddenly became a mic-drop moment.

Business analyst Jill Schlesinger, CFP, works for CBS News. Her email address is [email protected]. She is a former options trader and the CIO of an investment advising firm. Visit www.jillonmoney.com, her website.