The sample size of Presidential elections is small (47), which calls into question the value of investment-related conclusions from such data. With that warning, we note the data suggests election outcomes have minimal predictive value for investors. What we do know, however, is that market volatility is typically higher around elections.

The historical data suggests that the most favorable outcome for markets is a divided Congress with a Republican-controlled Congress a close second. A Republican-controlled Congress tends to be better received by markets regardless of which party controls the executive branch. Based on our approach of taking a long-term view and focusing on diversification and generating durable returns over a full market cycle, we do not approach elections as a tradable event.

With that backdrop, a resounding victory by Donald Trump to secure a second presidential term, coupled with the potential for a red sweep, naturally has investors waking up this morning wondering what it could mean for the economy and markets. To that end, let us discuss some of the anticipated impacts on economic growth, fiscal policy, trade and financial markets.

1. Economic Growth and Fiscal Policy:

• Partial Trump Scenario: Adopting a “partial Trump” scenario as a starting point, we would assume that the Republican-led Congress will extend the 2017 tax cuts and increase government spending. While this might provide a short-term boost to growth, it is unlikely to have an immediate substantial impact; however, we would expect Real GDP growth to be marginally higher in 2026 than it would have been with a more balanced election outcome. Looking out a bit further, however, as fiscal support wanes and immigration cuts reduce workforce growth, GDP could fall below the current trajectory by 2028.
• Fiscal and Inflationary Pressures: Fiscal risks have intensified compared to Trump’s first term. In 2016, the 10-year Treasury yield was around 1.8%, the federal deficit was approximately 3% of GDP and federal debt stood at 75% of GDP. Today, these figures are 4.4% for the Treasury yield, 7% for the deficit and nearly 100% for the debt. Despite these higher fiscal pressures, the dollar’s reserve currency status should mitigate excessive fiscal concerns. Just as inflation seems to be coming under control, we could see a shift back in the other direction given Trump’s policies, including tax cuts, tariffs and immigration reductions.

2. Market Reactions and Bond Yields:

• Treasury Yields and Monetary Policy: The election has triggered a rise in Treasury yields, particularly at the long end of the curve, likely due to both inflationary expectations mentioned above and a reduced probability of a recession. The anticipated inflationary effects of Trump’s tax cuts, tariffs and restrictions on immigration could prompt a higher trajectory for the federal funds rate.
• Implications for the US Dollar: Higher yields have contributed to a rally of the US dollar, supported by stronger domestic returns on investment. The dollar’s outlook may hinge on the size of any forthcoming stimulus. There is a need to monitor foreign central banks’ responses, particularly those of economies likely to face tariffs, as they may allow their currencies to depreciate to absorb tariff-related impacts. A recent example is the depreciation of the Chinese renminbi, potentially indicating early foreign market adjustments.

3. Trade Policy and Global Relations:

• Targeted Tariffs and Trade Uncertainty: It is likely that Trump will employ his presidential authority to enforce targeted tariffs on trading partners like China, Mexico, Canada and the EU. These tariffs could have variable timing and magnitude, and more information is still needed to determine specific scenarios that could unfold. Generally speaking, however, the anticipated tariffs will likely raise inflation domestically and create additional uncertainties in trade relations, especially as countries may adjust their currencies and economic policies in response.
• Potential for Maximum Trump Scenario: If we take one step further from a “limited Trump” scenario and look at a “maximum Trump” scenario we would expect to see even more aggressive trade policies, which could lead to more pronounced economic disruptions.

4. Equity Markets and Corporate Tax Cuts:

• Initial Rally with Caution: Following Trump’s victory, US equity futures, particularly those linked to small-cap stocks, responded positively. This initial “Trump trade” could mirror the stock market’s response in 2016, when hopes of corporate tax cuts outweighed trade concerns. Republican control of the House would likely increase the probability of corporate tax cuts, boosting market sentiment.
• Historical Precedent: It is worth remembering that while equities rallied initially in 2016 due to anticipated tax cuts, the market did experience a setback when the trade war commenced in 2018. This historical context suggests that while the immediate reaction has been positive, potential trade policy shifts could reintroduce meaningful market volatility. With current S&P 500 market valuations 35% higher (Shiller P/E of 36.4 vs. 26.9) than in 2016, the downside risk is elevated.

Conclusion and Considerations: As we move forward, there are several critical aspects to watch:

• The evolution of fiscal policy and whether rising fiscal pressures may prompt a reduction in Republican appetite for tax cuts.
• The development and magnitude of tariffs, along with the corresponding responses from foreign central banks.
• The trajectory of bond yields and how they respond to likely policy changes.
• Stock market responses, particularly in sectors sensitive to tariffs and immigration policies that may face additional volatility depending on trade developments.

Given these dynamics, the immediate market response has been one of optimism, but the longer-term effects could vary significantly depending on how these policies unfold. Because of uncertainties such as these, which are commonplace in the financial markets and global economy, we believe it is important to consider multiple economic scenarios in developing a strategic allocation and ensure the portfolio has adequate protection against adverse scenarios. Rather than predict one specific outcome, we choose to prepare portfolios for a range of market environments. As noted above, the potential for higher inflation has risen, and the probability of a recession has declined, making strategic allocations beyond traditional asset classes into Diversifiers and Real Assets particularly important. We will continue to monitor and update our thinking as further details emerge on the administration’s specific policy implementations. We will then look to ensure that we have exposure to attractive investments across asset classes that, when combined in a portfolio, aim to produce strong results over the long term regardless of shifting market environments.

The information contained in this report is confidential and proprietary to Oxford and is provided solely for use by Oxford clients and prospective clients. The opinions expressed are those of Oxford Financial Group, Ltd. The opinions are as of date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Tax and legal counsel should be engaged before taking any action. Past performance is not indicative of future results. OFG-2411-6