This is the final report of a four-part series on the 2024 U.S. general election. Part I, Part II and Part III are available for review.

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It’s been about a month since Donald Trump’s decisive victory in the 2024 U.S. Presidential election concurrent with a (modest) red sweep. Since then, U.S. equity markets have responded with enthusiasm – likely fueled by the market’s anticipation of more business-friendly policies, such as lower corporate taxes, greater deregulation, and looser fiscal policy. Yet several questions remain with respect to policies that may be adopted by the incoming administration. Let’s look at the potential implications of some of those.

Our general view is that Trump’s desired policies around fiscal spending and tariffs risk placing upward pressure on inflation – running counter to his campaign promises to slay said economic dragon. The timing of a potential inflection higher is less than ideal as inflation remains above the Federal Reserve’s target.

We concede that a red sweep, with the Republican Party controlling the White House, Senate and the House of Representatives, would suggest that the President-elect is emboldened to do more of what he said he was going to do on the campaign trail. However, the majority Republicans hold in Congress is slight, which could pose an obstacle to the passage of any legislation if the Democrats are united in opposition and if less than a handful of GOP members dissent. In addition, there are moderates in the House that could also reign in some of Trump’s ambitions from a policy perspective.

Trump has already begun to appoint prominent leaders from Wall Street as top-ranking officials in his cabinet. We believe these appointees are likely to be more sensitive to the risk of re-igniting inflation (particularly at a time when the fiscal budget deficit and national debt are already stretched), which could jeopardize the path for rate cuts and obscure economic growth. Indeed, the most emphatic takeaway from the U.S. election is that high inflation comes at a high political cost. Trump also typically uses the financial markets as a barometer of his performance. A narrative of higher-for-longer interest rates due to a reacceleration in inflation bodes poorly for stock and bond returns.

These are mitigating factors in our view, and we would be inclined to focus less on Trump’s governance by tweet, and more on what proposed legislations are being discussed and moved through the House of Congress. We believe that the incoming administration may only be able to deliver a watered-down version of Trump’s original proposals.

Tariffs, tariffs, tariffs: Retaliation and remediation  

As we discussed in Part II, Trump has been a steadfast proponent of erecting more trade barriers to protect and rebuild the U.S. manufacturing base, stating “To me, the most beautiful word in the dictionary is tariffs.”¹ On the campaign trail, he proposed a tariff of 60 per cent or higher on Chinese goods,² alongside a 10-20 per cent blanket tariff on all other global trading partners, including Canada. He has also pledged to renegotiate the U.S.-Mexico-Canada Agreement (USMCA), which is due to be renegotiated in 2026. However, more recently, Trump threatened to tear up the USMCA on day one of his administration (which would be a violation of the agreement), indicating that he would impose a 25 per cent tax on all imports into the U.S. from Canada and Mexico,³ and an additional 10 per cent on goods coming from China.⁴

With more than 75 per cent of Canadas’s exports (namely energy and vehicles) going to the U.S.,⁵ a blanket tariff between 10 and 25 per cent, concurrent with a softening economic backdrop, is particularly unfavourable for Canadian GDP growth. Yet our base case is that even if tariffs are put in place, they will not be of the magnitude that Trump has proposed. Rather, we believe such tariffs will be used as bargaining chips to extract concessions from trading partners.

Recent additions to Trump’s administration certainly suggest a more moderate stance towards tariffs. For example, Howard Lutnick, key transition adviser and head of brokerage and investment bank Cantor Fitzgerald, has been tapped to lead the Commerce Department. Lutnick has publicly suggested that Trump does not plan to impose tariffs on everything. He has also talked about how he would use tariffs to influence specific industries, and as an edge in trade negotiations. 

Similarly, Trump’s pick for Treasury secretary, hedge fund investor Scott Bessent, could be construed as more of a conciliatory choice when it comes to tariffs. Bessent has characterized Trump’s threat of higher levies as a “maximalist negotiating position.”⁶ He has also called for tariffs to be “layered in gradually.”⁷

In response to tariff threats, America’s trading partners are considering reprisals in kind. When Trump introduced higher tariffs in his first term, Canada and other countries responded with retaliatory tariffs of their own. In 2018, Trump imposed a 25 per cent tariff on steel and a 10 per cent tariff on aluminum products amid negotiations of the USMCA. Canada responded by releasing a list of retaliatory tariffs on items imported from the U.S. in the amount of about $17 billion worth of steel, aluminum and hundreds of other products. Based on recent reporting, government officials in Canada are already examining such retaliations again should Trump make good on his tariff threats. While no decisions have been made, preparations for every eventuality are being considered.  

Still, our view, and what we believe is the general consensus among economists, is that escalating tariff wars represent an economic zero-sum game. However, particularly for Canada, any retaliatory measures are unlikely to fully deter additional tariffs from the U.S., nor are they likely to confer an equivalent level of economic damage on U.S. economic growth.

Perhaps in recognition of this dynamic, government representatives from Canada had already begun to lean into such negotiations well ahead of the election, engaging with Trump’s team and leveraging existing relationships within his inner circle. Upon Trump’s election, Prime Minister Justin Trudeau revived a special cabinet dedicated to Canada-U.S. relations that will focus on “critical Canada-U.S. issues,”⁸ and recently paid a personal visit to Trump at Mar-a-Lago.

We suspect the concessions the Trump administration will seek to extract from Canada will include greater spending and an expedited timeline towards NATO’s 2 per cent defence-spending target. Tighter border controls, particularly amid the threat of mass deportations in the U.S., is also likely on the table. Lastly, Trump would like to ensure that Canada and Mexico are not used as a back door for China to import cheaper goods into the North American market. We suspect that Trump will demand greater alignment with its tariffs on China by both of its North American trade partners.

To some extent, this alignment has taken shape in Canada. This year, Canada announced it is launching a 100 per cent tariff on imports of Chinese-made electric vehicles, matching U.S. tariffs. Canada also imposed a 25 per cent tariff on Chinese steel and aluminum. Mexico does not have similar tariffs. Further, Canadian officials say they are ready to make new investments in border security and work with the Trump administration to lower the number of migrants that seek to skirt deportation in the U.S. by migrating north.

While the aforementioned concessions will likely be at a cost to Canada, the alternative of blanket 10-25 per cent tariffs would come at a far greater economic cost of higher inflation and a slowdown in trade. All told, a watered-down version of tariffs is a more likely outcome in our view, particularly as the incoming U.S. administration does not likely want to be held responsible for higher costs of imports from any of its trading partners, particularly if they engage in retaliatory tariffs.

Immigration, mass deportations and the labour market

Trump has consistently vowed to carry out the “largest deportation in American history.” He has, at various points, claimed he would deport at least 15 million people – and even as many as 20 million –who are in the U.S. illegally. However, this figure is unverified. In 2022, there were an estimated 11 million undocumented immigrants living in the U.S., with 8.3 million of these employed, according to a recent Pew Research report.⁹ Although migration to the U.S.-Mexico border reached record levels in 2022 and 2023, it dropped some 70 per cent in 2024 to the lowest levels in years following stepped-up enforcement by Mexico and a tightening of asylum restrictions under President Joe Biden.

Regardless of the total numbers, details on how Trump will carry out his deportation plan are generally sparse. In the past, he has suggested he would rely on wartime powers and military troops. He has hinted that he may declare a national emergency to allow him to use the military to remove people. This is the same workaround he used in late 2018 after his party lost congressional control post mid-term elections. Still, even the broad authority of the National Emergencies Act may not enable Trump to drive a military-run mass deportation scheme, particularly given the estimated costs involved.

Experts and advocates have argued that a deportation campaign of such a scale would raise legal and logistical challenges. But importantly, costs for mass deportations are substantial, particularly given the lack of infrastructure in the U.S. to execute against such a policy.

A new report from the American Immigration Council, an immigration rights research and policy firm, estimates that deporting 1 million undocumented immigrants a year would cost more than $88 billion annually.¹⁰ The report also estimates a cost of roughly $315 billion for a one-time effort to deport even more people in one year, including $167 billion to detain immigrants en masse. According to the group, the two largest costs would be for hiring additional personnel to execute the deportation raids and to construct and staff mass detention centres.

Trump’s first term in 2016 appears to bear out these challenges. While maintaining a similar campaign promise, Trump deported more than 1.5 million people during his four years in office, according to the Migration Policy Institute.¹¹ But that was about half the 2.9 million deportations undertaken during President Barack Obama’s first term, and fewer than the 1.9 million during Obama’s second term. It is on par with Biden’s 1.49 million deportations under his most recent administration.

We believe Trump’s blue skies scenario, in which he is able to implement substantial deportations in a short period of time, could create greater tightness in the labour market in the short-to-medium term at a time when unemployment levels are hovering close to 4 per cent, which is already low. Such tightness could create greater upward pressures on wages, and subsequently augment inflation.

Over the long term, we wonder if a further tightening of the immigration spigots into the U.S. may be harmful to U.S. GDP growth. The U.S. population is older than it has ever been, with the 65-year-and-over cohort representing about 17 per cent of the U.S. population in 2020,¹² according to Census data. PRB.org estimates the number of Americans in this cohort and older could increase by more than 45 per cent to 82 million by 2050, representing 23 per cent of the population.¹³

The implications of such an aging demographic, in the absence of a disciplined immigration program to fill the void, include a shrinking revenue tax base, overall lower levels of consumption, greater pressure on entitlement programs, and rising healthcare spending as a percentage of GDP.

All told, we suspect that Trump will likely be somewhat successful in increasing the absolute level of deportations relative to the Biden administration. However, we believe deportations at a much greater scale will be limited by a lack of infrastructure, limitations on personnel, pushback by the democrats and logistics related to timing given the due process afforded to such individuals.

Unintended and paradoxical consequences of greater fiscal spending

In Part II, we discussed the broad platforms for Trump, including spending plans that could reintroduce fiscal stimulus into the economy. Broadly, he has proposed to modify and extend the Tax Cuts and Jobs Act (TCJA) that sunsets in 2025, further cut taxes for corporations and small businesses, increase military spending, strengthen border security, expand deportations and immigration enforcement, and increase support for housing, health care, and long-term care. He has also proposed ending taxation of tip income, overtime pay and Social Security benefits.

How such programs are ultimately going to be paid for isn’t clear. Trump has stated he would impose new tariffs on imports, repeal energy and environment-related spending, tax cuts and regulations, cut fraudulent spending, and end the Department of Education. Even if all of this were possible in just four years, it would still be incommensurate with the level of proposed spending, according to the Committee for a Responsible Federal Budget (CRFB). And as we highlighted in Part III, plans for fiscal stimulus would do little to address the ballooning U.S. government debt. According to the CRFB’s analysis, debt levels would increase by $7.5 trillion between 2026 and 2035 under Trump’s tax and spending plans.¹⁴

It is hard to know what the U.S. economy will look like over the course of the next several months. But should the expected soft-landing scenario play out (i.e. a slowdown in U.S. GDP growth rather than a full-blown recession), and inflation remains above or near the Fed’s long-term target concurrent with full levels of employment, the necessity of such fiscal stimulus is questionable.

If the Trump administration is able to follow through on its ambitious spending plans (and that’s a big if in our minds), such policies may drive inflation incrementally higher, which could complicate the path for the Fed going forward. Fed Chair Jerome Powell rightfully stated that there is little information on the timing and substance of any policy changes and has emphasized that the Fed would remain data-dependent. In the very short-term, we suspect that the Fed will likely stay the course with respect to modest rate cuts.

However, in the medium to long term, the Fed’s rate trajectory is obscured in the absence of further information on Trump’s ultimate fiscal policy. A continuation of expansive fiscal policy under the next administration in 2025 may rally inflation expectations, potentially moving the Fed to pause (or even hike rates in a more extreme scenario) and reignite the “higher for longer” narrative for the U.S. economy. That would place an upward bias on bond yields and likely put risk assets under pressure. In our view, such unknowns represent a source of volatility for the market in the short to medium term.

Ever in search of silver linings, our base case is that Trump won’t follow through on all his fiscal spending plans, though we do suspect he will be able to implement them in part. Such spending is sure to widen the already high fiscal deficit and invite the ire of fiscal deficit hawks – many of which belong to his party. We believe there will be dissenting voices, reasonably among the democrats, but also within the Republican Party. The potential for bipartisanship, particularly with a narrow majority in both chambers of Congress, could stem the passage of such sweeping legislation. Further, the appointment of Bessent as Treasury Secretary has been favourably received by the markets given his depth of experience in navigating the twists and turns of markets during his extensive career as a hedge fund manager. And while Bessent is seen as a proponent of pro-business policies, he is also seen as a fiscal hawk with a desire to reduce deficit spending.

The “Trump Trade” should not give way to complacency in portfolios

In the near future, we’ll be watching closely as Donald Trump takes office as the 47th president on Inauguration Day on Jan. 20, 2025. Trump’s propensity to amplify his policy ambitions via frequent social-media posts is sure to create waves in the media and in markets. But such volatility is not a decisive indicator of ultimate policy, and we would be more inclined to pay attention to proposed legislation and its journey through Congress.

As for investors’ portfolios, if inflation expectations remain stable, the red sweep would suggest a favourable outlook for risk assets, particularly for economically sensitive sectors alongside the U.S. dollar. Still, uncertainty over the incoming administration’s policies underscores the benefit of well-diversified portfolios across asset classes (i.e., equities, fixed income and alternative investments), geographies and style (i.e., growth versus value). The current consensus soft-landing call for the U.S. economy is hardly grounds for complacency, nor is it a fait accompli.

While outsized returns from the U.S. large-cap equites have been a boon to many portfolios, investors should remain wary of an over-concentration in this asset class at the expense of others, particularly considering current above-average valuations. We continue to see pockets of fixed income, alternative investments, and dividend growth or value-oriented equity strategies as areas in the market that can provide some level of ballast to portfolios, while also offering decent risk-adjusted returns.  

Sources:

¹The Associated Press. “Trump Tariffs, Deportations Could ‘reignite’ Inflation, Economic Studies Say | CBC News.” CBC News, CBC/Radio Canada, 15 Oct. 2024, www.cbc.ca/news/world/trump-inflation-analysts-1.7352209.

²Pitas, Costas. “Trump Vows New Canada, Mexico, China Tariffs That Threaten Global Trade | Reuters.” Reuters, www.reuters.com/world/us/trump-promises-25-tariff-products-mexico-canada-2024-11-25/. Accessed 5 Dec. 2024.

³Benchetrit, Jenna. “Trump’s Tariffs Would Crush Canada’s Economy. Why Some Industry Leaders Are Calling His Bluff | CBC News.” CBC News, CBC/Radio Canada, 28 Nov. 2024, www.cbc.ca/news/business/canadian-impacts-trump-tariff-proposal-1.7393493.

⁴Swanson, Ana, et al. “Trump Plans 25% Tariff on Canada and Mexico, Potentially Crippling Trade.” The New York Times, The New York Times, 26 Nov. 2024, www.nytimes.com/2024/11/25/business/economy/trump-tariffs-canada-mexico-china.html.

⁵Lord, Craig. “Canada Failed to Diversify Trade Ahead of Trump Tariff Threats: Experts – National.” Global News, Global News, 29 Nov. 2024, globalnews.ca/news/10892822/trump-tariffs-canada-trade-diversity/.

⁶Mills, Madison. “Trump Tariffs Inspire ‘Maximalist Negotiating’: Scott Bessent.” Yahoo! Finance, Yahoo!, finance.yahoo.com/video/trump-tariffs-inspire-maximalist-negotiating-155940040.html. Accessed 6 Dec. 2024.

⁷McGraw, Meridith, et al. “Trump Taps Hedge Fund Manager Scott Bessent to Lead Treasury.” Politico, 22 Nov. 2024, www.politico.com/news/2024/11/22/scott-bessent-treasury-secretary-trump-00188549.

⁸Aiello, Rachel. “PM Trudeau Revives Canada-U.S. Relations Cabinet Committee after Trump Win.” CTV News, 7 Nov. 2024, www.ctvnews.ca/politics/pm-trudeau-revives-canada-u-s-relations-cabinet-committee-after-trump-win-1.7101787.

⁹Passel, Jeffrey S. “What We Know about Unauthorized Immigrants Living in the U.S.” Pew Research Center, Pew Research Center, 22 July 2024, www.pewresearch.org/short-reads/2024/07/22/what-we-know-about-unauthorized-immigrants-living-in-the-us/.

¹⁰“Mass Deportation: Devastating Costs to America, Its Budget and Economy.” American Immigration Council, 11 Nov. 2024, www.americanimmigrationcouncil.org/research/mass-deportation.

¹¹Bush-Joseph, Kathleen, and Muzaffar Chishti. “The Biden Administration Is on Pace to Match Trump Deportation Numbers-Focusing on the Border, Not the U.S. Interior.” Migration Policy Institute, 27 June 2024, www.migrationpolicy.org/article/biden-deportation-record.

¹²Caplan, Zoe. “U.S. Older Population Grew from 2010 to 2020 at Fastest Rate since 1880 to 1890.” United States Census Bureau, 25 May 2023, www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html.

¹³Mather, Mark, and Paola Scommegna. “Fact Sheet: Aging in the United States.” PRB, www.prb.org/resources/fact-sheet-aging-in-the-united-states/. Accessed 6 Dec. 2024.

¹⁴“The Fiscal Impact of the Harris and Trump Campaign Plans.” Committee for a Responsible Federal Budget, www.crfb.org/papers/fiscal-impact-harris-and-trump-campaign-plans. Accessed 6 Dec. 2024.

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