Post-Election Reflections: Why Discipline Matters More Than Overreaction

As we reflect on one of the most contentious U.S. elections in recent history, perhaps the biggest surprise was the quick declaration of a winner within hours of the polls closing. Many political experts had anticipated a nail-biter, with a drawn-out vote count and no clear victor for days. However, few predicted the decisive ‘red wave’ sweeping across county after county, leading to Trump securing over 300 electoral votes, and a Republican majority in both the Senate and the House.

With the election now firmly resolved, investors can begin focusing on the potential economic impacts of Trump’s proposed policies, particularly around tax cuts and deregulation, tariffs, and immigration reform.

Market Reaction and Caution Ahead

While the size of Trump’s victory may have surprised many, the market’s positive response was expected. U.S. equities saw one of their strongest weeks in years, climbing nearly 5%, while bonds sold off. Despite this rally, there’s reason for caution. While policies like tax cuts and deregulation can be pro-growth, others – such as broadly applied tariffs and reduced immigration – may dampen economic momentum. At the moment, equity markets are primarily reacting to the pro-growth elements, but this could shift.

Even the tax cuts – both personal and corporate – have an underlying concern: the U.S. fiscal deficit. Worries about inflation and an increasing fiscal deficit have already impacted the bond market, driving long-term yields higher. Notably, this uptick has occurred even as the Federal Reserve has been cutting short-term rates. Rising bond yields may soon become a concern for equity markets as well, as they affect both earnings and stock multiples. Many believe a 5% level on the U.S. 10-year Treasury bond (up from 4.45% currently) is a tipping point that could challenge the equity market.

Impact on Canada and Broader Tax Implications

As U.S. tax policies evolve, the tax gap between the U.S. and Canada seems set to widen, particularly for individuals with investment income and capital gains. This could have negative implications for Canadian productivity and the Canadian dollar, which is at its lowest level since the pandemic. Proposed U.S. tax changes include reducing the long-term capital gains rate to a maximum of 15% (from 20%), lowering the federal corporate tax rate to 15% for domestic production, and potentially making the U.S. estate tax exemption of $13.6 million permanent.

Policy Intentions vs. Market Realities

Even with clear policy intentions, actual market outcomes can vary significantly. Constructing reliable investment strategies based on anticipated policies is challenging, as macroeconomic forces often drive markets more than individual policies do. For instance, during Trump’s first term, despite his support for traditional energy, the S&P 500 Energy Index fell by 40%, while the S&P 500 Global Clean Energy Index surged by 275%. Conversely, under Biden – who supported renewables and passed the $369 billion Inflation Reduction Act – the energy index more than doubled, while clean energy stocks fell over 50%. Ultimately, global supply-demand dynamics and interest rates exerted greater influence than policy alone.

The Case for Global Diversification

With one party now holding the presidency and Congress, policy concentration creates a risk for investors who are solely U.S.-focused, as shifting priorities could create volatility or limit economic flexibility. A globally diversified portfolio helps mitigate this risk, spreading exposure beyond a single country’s political landscape and accessing growth opportunities worldwide.

Just as it was challenging to predict the election’s outcome, forecasting the impact of potential policies on various markets and asset classes is equally uncertain. Markets have thrived amid uncertainty for centuries. For investors, if your goals, time horizons, and financial needs remain steady, and your portfolio is diversified and aligned with a solid tax plan, there’s little reason to make reactive changes. Staying disciplined and avoiding kneejerk responses is often the best approach for navigating the road ahead in any presidency.

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