The results of the US election on November 5 saw Trump and the Republican party take a landslide win against the Democrats and Kamala Harris. The Republicans also gained control of the Senate and have a current sizable lead in retaining control of the House of Representatives, but this final result might not be known for a few more days.
The initial equity market reaction was frenzied and has been deemed the “Trump Trade.” On the night of the election, US equity futures were up more than 2%, with the major indices seeing an increase of over 2.5% the following day and the US small-cap benchmark, the Russell 2000 index, surging 5.85%. Credit spreads continued to narrow, and treasury yields increased, showing sentiment of coming economic growth. Bitcoin made new highs, and the US dollar appreciated with one of it’s largest single-day moves in over a year. It increased it’s spread to country currencies that Trump warned would receive tariffs, such as Mexico and China. The spread between Treasury Yields and Inflation-Protected Notes also widened, showing the markets were bracing for an expected increase in inflation. WTI oil prices plunged by 3% to below $70 a barrel on the increase in USD and prospects that the US will increase oil production. This is based on Trump’s stated policy of fully encouraging US fossil fuel production, bannered by the slogan “drill, baby, drill.”
If the Republicans end up taking the House of Representatives, it likely means a swift adoption of Trump’s campaign proposals, such as tax cuts and tariff increases. This could increase the Federal deficit by $10 trillion over ten years according to an analysis done by the Committee for a Responsible Federal Budget. To help offset this, he has proposed to raise tariffs 10%-20% across the board on all imports and by at least 60% on Chinese products. It is estimated the Federal debt could rise to 142% of GDP by 2035 compared to it’s current 125% of GDP.
The US economy could see a short-term boost from the accommodative fiscal policy, but it could have adverse longer-term impacts. The higher tariffs could lead to potential trade retaliation from other countries. The fiscal spending could lead to higher inflation and force the Federal Reserve to slow or even reverse interest rate cuts due to economic overheating. We still don’t have clarity on the priorities or timing of these policies, but the knee jerk reaction of the markets yesterday shows these expectations.
If the Democrats take the House, the full extent of Trump’s tax cuts most likely won’t be implemented. This will lessen the negative impact on the deficit and risk of the economy overheating. However, tariff measures, to an extent, can still be passed. Trump also wants to deregulate industries. These policies are inflationary.
The Federal Reserve interest rate policy has been in a delicate balance with inflation for the last few years. They will most likely stick with their rate path for the end of the year. They reduced their target range for the federal funds rate by the expected .25% on November 7th. We also expect them to continue with another rate cut in December. In 2025, however, with fiscal policy likely taking a more stimulative turn, there could be a disruption to the Federal Reserve’s expected path for the economy and it will likely cause the Fed to adjust to a more tightening stance. The pivot will most likely come when early indications of Trump’s stimulative policies show their effect. Current tax cuts are set to expire at the beginning of 2026, so Trump’s new policies will probably be enacted quickly, stunting the prospects for Fed rate cuts extending passed 2025. It’s also likely Trump will push towards aligning Central Bank action with his own agenda, which creates its own set of risks.
Canada might initially benefit from a Republican sweep. With the US being our largest trading partner, stronger US growth will be to our benefit. If the Keystone XL pipeline project is resurrected, it will also provide a material bump to our energy sector. However, there is uncertainty about whether tariffs will be placed on Canadian goods and the fate of the free trade agreement we have with the US, USMCA. If trade barriers are increased, this further weakens our economy. This doesn’t bode well for the future value of our currency against the US dollar. These threats could spur our Central Bank to increase their rate cutting, putting continued pressure on the CAD. Trump’s stated views on providing less support to inter-country arrangements might also push Canada to raise its contribution to NATO, increasing our deficit. Lastly, our government’s new policy of slower immigration will also be tested by a potential increase in the inflow of migrants seeking to cross the US boarder into Canada because of Trump’s pledge to deport undocumented immigrants.