Thanksgiving. It’s my all-time favorite holiday. It’s in the fall (my favorite season); it features my favorite foods (roast turkey and pumpkin pie); it’s quality time spent with family and friends; and most importantly, it’s a reminder of how much there is to be grateful for: health, family, community, freedoms, to name a few.

Investors have plenty to be thankful for this year — tamer inflation, a robust economy, a pivot to lower interest rates. And just this last month, new market highs following Donald Trump’s presidential election victory. The DJIA topped 45,000 for the first time in history, before finishing just shy of that record. The Dow rose 7.5% in November, the S&P 500 gained 5.7%, and the NASDAQ, 6.2%. While notable, those gains are small potatoes compared to Bitcoin, which rose 40% during the month on Trump’s expressed support for digital assets and the prospect of a new SEC chair with a less adversarial approach to crypto. Meanwhile, the 10-year US Treasury yield declined slightly to end the month at 4.19%.

Since the election, what’s playing on investors’ and consumers’ minds isn’t turkey, but tariffs and taxes — two key issues that will impact our wallets and our portfolios. Let’s double-click into the potential impacts of each one.

Tariffs

Tariffs are taxes on goods imported into a country (in this case, the US). US companies that import goods — either to resell or as part of their supply chains — will pay these tariffs and most likely pass these costs on to customers. During his campaign, President-elect Trump proposed a 60% tariff on goods from China and a 20% tariff on all other imports, but more recently pronounced a 25% tariff on goods from Canada and Mexico, and an additional 10% tariff on products from China.

While inflation is expected to continue stabilizing and slowing into 2025, tariffs can threaten that progress by pushing prices up for customers. Tariffs could also lead to slower global trade and lower global growth if other countries impose retaliatory tariffs against the US.

Whether Trump’s statements are a negotiation tactic or reflect a future reality isn’t clear. But what is certain is that any tariffs will likely raise prices on goods, leading to inflationary pressure. Estimates on the economic impact of Trump's proposed tariffs range from catastrophic to mild. The most likely scenario is somewhere in between, and depends on how much, which countries, what specific goods, and for how long.

The argument for implementing tariffs is to increase production domestically, protect and add manufacturing jobs, spur innovation, and generate revenue for the US government. The specific focus on Canada, Mexico, and China is intended to put pressure on illegal immigration and illicit drugs such as fentanyl flowing into the US. These three countries are the US’ largest trading partners, with an aggregate $1.3 trillion in goods imported in 2023.

80% of Mexico’s exported goods come to the US, and 76% of Canada’s, so these two countries will feel the greatest pressure to address Trump’s illegal immigration and illicit drug concerns. The vast range of imports coming from these three countries — from oil, autos, and machinery to electronics, toys, and household appliances — means that everyone will be impacted by tariffs that are applied indiscriminately to goods coming from Mexico, Canada, and China.

Taxes … and the federal deficit

President-elect Trump will likely extend the tax cuts that he signed into law with the Tax Cuts and Jobs Act (TCJA) in 2017. That means no changes to the top individual income tax rate of 37%, to the larger exemption amounts for alternative minimum tax determination, or to the current $13.61 million per person estate tax exclusion, among others. Trump has also proposed eliminating taxes on tips, Social Security income, overtime pay, and income earned by first responders.

While stocks could benefit, less taxes paid means less revenue for the US government, which in turn means increasing national debt. The proposed tariffs will bring in federal revenue, but not enough to offset the loss of revenue from tax cuts. So the US government will need to borrow more to keep the government and federal programs running. The federal deficit (the gap between spending and revenues) hit $1.8 trillion in 2024 and is projected to increase under the Trump administration.

With interest rates higher than in the recent past, the cost of servicing newer debt that will continue to grow is daunting. While Trump seeks to reduce unnecessary costs through the newly created Department of Government Efficiency, it’s unclear what savings that will yield and when.

While the federal deficit is worrisome, it’s useful to look at a more telling metric: the ratio of the deficit to GDP. The chart below shows the US federal budget deficit running at about 6% of its GDP. Note that this figure was as high as 15% during the pandemic, when the US government authorized specific spending to ease the economic impact of COVID-19.

While we would all rather pay less and not more in taxes, are lower taxes sustainable in the face of increased spending? Or can the economy expand and grow to support higher levels of debt?

As an optimist, I believe it’s possible — through innovation and technology — for US GDP to grow at a rate that can mitigate the impact of a growing federal deficit. We have just experienced an unprecedented period of uncertainty — a global pandemic, worldwide supply chain disruption, elevated inflation, accelerated interest rate hikes, and geopolitical turmoil. Yet today, the US economy is healthy and growing, alongside other countries to a lesser extent.

The most successful companies aren’t complacent. They don’t “stand and wait” defensively, but evolve and adjust dynamically to current economic and labor conditions — mitigating risks and actively seeking out ways to cut costs, increase productivity, and continue growing, in spite of. Over the last decades, continuing advances in technology have significantly increased worker productivity and efficiency, and spurred innovation in ways we never imagined.

Many believe that AI, in all its different forms, is the next frontier in increased productivity. According to recent studies, generative AI has the potential to add trillions to the global economy, and drive up labor productivity beyond that delivered by personal computers and the internet. While AI’s full potential won’t be realized for many years, some companies are already experiencing gains, and new start-up companies are harnessing its power for innovation. I’m certain that the federal debt will rise, but I’m hopeful that innovation and technological progress will be the gravy train that keeps fueling the economy — and the markets.

Chief Investment Officer Dr. Sylvia Kwan

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Disclosures