November 2024 – By Ian  Salisbury

Voters handed former President Donald Trump the White House on Tuesday, largely on the back of his pledge to improve the economy. But how will Trump’s second term really hit your wallet? A lot depends on whether you’re an investor, borrower, or just worried about higher prices.

Trump’s 2024 win against Vice President Kamala Harris links him with Grover Cleveland. It has been more than a century since an incumbent president was defeated in an election before scoring a comeback win during the subsequent presidential race. Polls consistently showed the economy was among voters’ top concerns this election cycle. Despite a bull market in stocks and low unemployment, voters have remained uneasy about their financial prospects, thanks in large part to surging inflation, which peaked at more than 9% in 2022.

Trump, a billionaire real estate developer and TV star, has long argued his business acumen can fix America’s financial problems. His proposals, including tax cuts and tariffs for imported goods, aim to address many Americans’ struggles. But economists—and markets—have warned that some may backfire.

Here’s what Trump’s financial plans mean for different aspects of your financial life.

Inflation

No one likes higher prices—since voters up and down the income scale see them daily, they’re a constant reminder something in the economy is out of whack. Although the rate of inflation has slowed to close to 2%, the Fed’s target rate, prices remain about 20% above where they were before the pandemic. They have frequently been cited as the reason millions of Americans remain dissatisfied with an otherwise-healthy economy.

Some bad news for inflation voters: Prices are set by slew of market forces, most of which the president doesn’t control. What’s more, while Trump has pledged to fix inflation, several of his specific policy proposals could make it worse. Tariffs he has promised on imports from China and elsewhere could push up the price of goods like clothes and appliances. At the same time, proposed deportations would likely increase costs for construction and agriculture firms, while tax cuts would add to the national debt.

One forecast earlier this fall from the Peterson Institute for International Economics suggested Trump’s policies could send inflation back up above 6%. But other analysts, assuming Trump’s policies will be watered-down from the campaign trail, see much less dramatic increases, increasing the average inflation rate by 0.4 to 0.9 percentage points.

Taxes

A large part of Trump’s economic message has always been lower taxes. The 2017 Tax Cuts and Jobs Act was his first term’s signature economic policy, and a large share of the law’s features are set to expire at the end of next year. A Trump win means that voters can bank on many of those items being extended—especially if Republicans end up taking both chambers of Congress.

That should translate into lower taxes—with some important caveats. For one, lower taxes in Washington-speak means lower relative what you would pay if the were to law expire and if pre-2017 tax rules come back into effect. It doesn’t necessarily mean lower relative to what you are paying right now.

In addition, how much your taxes go down depends a lot on our individual situation. While Trump has promised tax cuts across the board, wealthier Americans, who pay the most in taxes, can count on far bigger tax breaks. One pre-election analysis from the Penn Wharton Budget Model, a nonpartisan research project, found middle-class families earning $81,000 on average would see their incomes increase $1,700 as a result of Trump’s tax plans. The breaks, the analysis found, increased as taxpayers climbed the income scale, with those making $1.8 million likely to see gains of nearly $50,000.

In addition to extending his 2017 tax cuts, Trump has also proposed a welter of policies aimed at appealing to individual voting blocs, such as exempting tip or Social Security income from taxes, and expanding the federal deduction for state and local taxes. These could impact relevant voters if they become law. While economists and other critics have widely derided these plans as get-out-the-vote gimmicks, anything is possible.

Markets and Interest Rates

The stock market’s initial verdict on Trump’s victory was a positive one. The Dow leapt more than 3% on Wednesday and was on track for a record close. One reason: In his first term, Trump lowered the top corporate tax rate to 21% from 35%—and during the campaign he promised to lower it again to 15% for many companies.

That said, the stock market tends to perform well no matter which party holds the White House, and markets could be reacting with relief that the tossup election produced a clear, undisputed winner. In the long run, there are plenty of investors who worry that the market, already up more than 24% this year, could underperform in coming years —although mostly for reasons that have nothing to do with a Trump presidency.

Bonds also reacted dramatically to Trump’s victory. In this case, bond investors weren’t necessarily issuing a vote of confidence. Rates on 10- year Treasury notes jumped 0.17 percentage points to 4.457% on Wednesday. They have climbed steadily over the past month as polls tightened and a Trump victory looked more likely.

Long-term interest rates can rise when bond investors anticipate strong economic growth—and that is certainly a possibility. But most Wall Street commentary has attributed the recent increase to worries that Trump’s tariffs and tax cuts will increase the national debt and stoke inflation.

Higher bond yields can benefit savers, who enjoy more generous interest payouts, but they also push bond prices down, meaning bond investors can see negative total returns. In the past month, the iShares Core U.S. Aggregate Bond ETF, which tracks the broad bond market, has posted a negative return of about 1.3%.

Higher interest rates also hurt borrowers, including home buyers. While it’s too soon to tell how mortgage rates will react to Tuesday’s news, 30-year fixed mortgage rates, which closely follow 10-year Treasury notes, also climbed over the past month as Trump’s chances improved. Last week average rates stood at about 6.7%, according to Freddie Mac, up from 6.1% in late September.

This Barron’s article was legally licensed by AdvisorStream.

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