Elections 2020—Likely Policies in a Trump Second Term

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Trump’s foreign policy priorities

by Michael Taylor, CA, Investment Strategy Analyst

Key takeaways

  • Trump’s 2020 campaign foreign-policy priorities include renegotiating transactional relationships with alliances and nongovernmental organizations (NGOs), maintaining military strength, and ending U.S. reliance on China.
  • Trump aims to bring back one million manufacturing jobs from China. Biden has pledged to create five million high-quality jobs.
  • If they are enacted, we believe that Trump’s proposed foreign economic policies would support the dollar and benefit the U.S. economy and equity markets over international markets. The prospect of additional trade tension with China is a source of uncertainty and potential risk for more serious conflict, but the two countries maintain strong commercial ties that are very likely to slow the escalation in tensions.

Seeking to build on his first term

As the U.S. economy struggles with setbacks brought on by COVID-19, President Trump is seeking to build on first-term accomplishments as he makes his case to voters for a second term. Over the past four years, Trump’s foreign economic policy achievements have included renegotiating trade agreements like the North American Free Trade Agreement (NAFTA) and implementing a Phase One trade deal with China. In the Middle East, diplomatic relations between Israel and the United Arab Emirates have been established. Critics have faulted the president for withdrawals from the Paris Climate Accord and the World Health Organization, along with Trump’s response to the pandemic. Trump pledges to revive a fragile economy, protect U.S. trade interests, and reshore critical supply chains, while maintaining a tough stance on immigration and China’s commercial policies.

Trump’s foreign-policy approach favors bilateral agreements and the use of tariffs and trade restrictions for leverage. He is critical of multilateral trade agreements, particularly with nongovernmental organizations (NGOs, such as the United Nations). Arguably, the most formidable foreign-policy challenge for the next administration, whether led by Trump or Biden, will be U.S.-China relations. In the wake of COVID-19, China has become a bipartisan issue. A recent Pew Research Center poll revealed that 73% of Americans hold an unfavorable view on China, and that sentiment crosses party lines.1 Wariness of Beijing is likely to carry into the next administration. Below, we review Trump’s foreign-policy planned priorities for a second term in office.

Priorities for a second term

Last month, President Trump articulated priorities for his second term under the rubric of “Fighting for you!” Trump’s foreign-policy priorities include renegotiating transactional relationships with international alliances and NGOs, maintaining and expanding U.S. military strength, and ending U.S. reliance on China.2

Although Trump’s foreign economic policies are less specific than Biden’s, they do emphasize reshoring of manufacturing jobs and purchasing of American-made products. Trump has pledged to return one million jobs from China and to boost U.S. production of medical supplies and pharmaceuticals, following shortages discovered during the pandemic. Trump also aims to offer tax credits and full expense reductions for essential medical and technology firms that return to the U.S. from China.

Holding China accountable for the pandemic now appears to resonate with Americans. Nearly 80% of Americans say that China’s initial response to the coronavirus contributed to its spread, and 50% think China should be held responsible.3 But foreign-policy challenges with Beijing extend beyond economics. Global concerns have been raised by China’s military buildup in the South China Sea, ethical violations of agreements with Taiwan and Hong Kong, human rights abuses of religious minorities, and accusations of interference in foreign politics. In fact, most Americans now view human rights as a higher priority than economic dealings for U.S.-China relations. And these concerns spill over to denuclearizing North Korea.4

What does America First mean for the economy and investors?

If enacted, we anticipate Trump’s proposed foreign policies would be slightly more positive for equity prices and the U.S. dollar — and more conducive to higher interest rates — than Biden’s. In terms of sectors, under Trump’s plan, Health Care may benefit if his tax incentives convince biotech and pharmaceutical firms to return to the United States. Information Technology and Communication Services also could benefit from policies that encourage innovation and reshoring of production, but production reshoring may hinder international business growth as overseas firms capture markets as U.S. firms retreat.

In a second Trump administration, we expect additional tension between the U.S. and China. This tension should result in additional restrictions on U.S. companies that outsource or sell technology to China. Additional mutual tariffs and other trade restrictions are likely between China and the U.S. These restrictions are likely to fall mainly on companies that import goods to the U.S. from China, especially technology goods. It’s also possible that some pharmaceutical companies may reshore production to the U.S.

Trade restrictions do not change any of our sector recommendations, because we see them as unlikely to turn the cost advantage to manufacturing in the U.S. during the next administration. But there are probable investment implications. If they are maintained or expanded, trade restrictions could:

  • Limit U.S. imports from China and thereby strengthen the dollar
  • Raise production costs for pharmaceuticals whose production returns to the U.S.

And the uncertainty about the path of future trade restrictions could create additional turbulence for the S&P 500 Index more broadly. A risk to this view is that the commercial dispute may make the diplomatic tensions more difficult to work through. The main risk is of confrontation in the region between the U.S. and China. For now, we do not believe that this risk is high, because of the cost involved in breaking off all relations.

Limits to global trade and any dollar strengthening would favor the U.S. over international economies, which underscores our continued preference for the U.S. over international markets. We also maintain our favorable ratings on the Information Technology, Communication Services, Consumer Discretionary, and Health Care equity sectors, because the U.S.-China strategic competition does not appear likely to bring most overseas supply chains back to the U.S.

Tax cuts and deregulation: what may lie ahead?

by Paul Christopher, CFA, Head of Global Market Strategy

Key takeaways

  • We believe that Trump’s goal of encouraging economic growth through tax cuts and deregulation has been somewhat successful during his first term.
  • If Trump is reelected, we expect his future efforts for deregulation and tax cuts to be dependent on the GOP’s congressional strength.
  • We believe that a continuation of a less onerous tax and regulatory regime under Trump’s policies would be neutral-to-positive for U.S. economic growth and U.S. equity markets. In terms of sectors, under Trump’s plan, Health Care, Information Technology, and Communication Services should benefit in a second Trump term.

Evaluating the Trump administration’s tax cuts and deregulation efforts

The Tax Cuts and Jobs Act of 2017 (TCJA) was championed by the Trump administration and was passed into law in 2017. The TCJA was known for decreasing corporate and individual tax rates, capping state and local tax deductions, and increasing the standard tax deduction for most filers. For individual filers, the TCJA decreased the tax rate for 5 of the 7 tax brackets, while the corporate tax rate was reduced from 35% to 21%. Many individual filers benefited from the TCJA, although limits on deductible expenses may have worked against some taxpayers. Chart 1 demonstrates that the majority of federal tax cuts went to the top 20% of income earners (individuals), with most of that benefit going to the top 5%. The TCJA increased the number of Americans with zero or negative income tax and the number taking the standard deduction (rather than itemizing). Both of these changes appeared to benefit lower-income households.5 The TCJA tax cuts for individuals are set to sunset (end) in 2025, but the corporate tax cuts were intended to be permanent. GOP leaders have indicated support for extending the individual tax cuts prior to their sunset date.

Chart 1. Share of TCJA tax decrease by income percentile

Chart 1. Share of TCJA tax decrease by income percentile
Source: “Effects of the Tax Cut and Jobs Act: A Preliminary Analysis”, Tax Policy Center, by William Gale, Hilary Gelfond, Aaron Krupkin, Mark J. Mazur, and Erid Toder, June 13, 2018. Income levels corresponding to the percentiles and quintiles shown are (in 2017 dollars): 20% for $25,000; 40% for $48,600; 60% for $86,100; 80% for $149,400; 90% for $216,800; 95% for $307,900; 99% for $732,800; and 99.9% for $3,439,900.

Research suggests that the TCJA will stimulate economic growth in the next few years, but with diminishing impact by 2027. Studies estimate a 0.5% per year benefit to U.S. economic growth this year but that the stimulus will have a negligible impact by 2027, as the economy is expected to return to full employment.

Another way to understand this is that an economy at full employment cannot benefit from additional stimulus the way it can when the economy is below full employment.6 Also, a survey of literature shows that different studies of the tax revenue generated by additional economic activity may reduce the primary deficit by between 19% and 70%. Put another way, these studies broadly suggest that the TJCA will not generate enough new tax revenue to replace revenue lost from the tax cuts.7


Another key Trump administration initiative has been deregulation. Trump has slowed the tide of new regulations and rolled back some business regulation, but deregulation efforts have largely been stymied by the federal judiciary. As of August 31, 2020, 128 deregulatory efforts had resulted in litigation, with 110 having a negative result for the Trump administration position. In fact, roughly 60% ended negatively for the Trump administration.8 Of an estimated 68,846 regulations adopted at the federal level over the past 24 years, Trump has removed 243 (with an additional 157 significant deregulation initiatives in progress and 26 relating to economic policy).9 The White House’s Council of Economic Advisers noted that, of 35 countries in the Organisation for Economic Co-operation and Development (OECD), the U.S. had the ninth most restrictive regulation of product markets; slightly less restrictive than Latvia and slightly more restrictive than Sweden.10

Our expectations in the event of a second Trump term

If President Trump wins a second term, we would expect the focus on lower taxes and deregulation to continue. We anticipate that further changes to federal tax law should be difficult for the GOP to achieve as we expect the Democrats to maintain House leadership. Similarly, we expect further deregulation efforts to be a slow process, due to the potential for legal struggles in federal court.
The critical factor for equity markets is U.S. economic recovery. Even without additional tax cuts and only limited additional deregulation, we believe that the continuation of a less onerous tax and regulatory regime under Trump’s policies would be neutral-to-positive for U.S. economic growth and U.S. equity markets. In terms of sectors, under Trump’s plan, Health Care may benefit if President Trump’s tax incentives convince biotech and pharmaceutical firms to return to the U.S. Information Technology and Communication Services also could benefit from policies that encourage innovation and reshoring of production.

Pax populi? Populism makes its mark in a watershed election

by Gary Schlossberg, Global Strategist and Michelle Wan, CFA, Investment Strategy Analyst

Key takeaways

  • We anticipate visible differences in traditional Republican and Democratic ideology should give voters a clear-cut choice on several issues in an election that is less than two months away.
  • Others will be struck by an overlap of views on key foreign and domestic economic issues, differing less in goals than in the means of getting there.
  • Similarities of populist goals between the two parties imply an opportunity for compromise on several issues, partisanship notwithstanding. We discuss several investment implications.

A blend of Republican traditionalism…

Differences between Republicans and Democrats on energy and school choice, along with several tax and health-care proposals, should give voters a clear-cut choice before they seal their write-in ballots or enter the polling booth.

“Traditionalist” Republican tax proposals floated during the campaign — favoring upper-income households and businesses — have included further capital-gain tax relief, payroll-tax reduction or elimination, and a beefed up Opportunity Zone program that defers capital gains on property sales through investment in economically distressed communities (see Table 1). Potential business tax breaks include extending several expiring provisions of the TCJA and a possible percentage point cut in the corporate tax rate to 20%.

…with traditionalist means for populist ends

Seemingly lost in this campaign is an overlap of views between the two parties, including stepped-up infrastructure investment, a tougher stance on China’s commercial and security policies, reshoring U.S. manufacturing, tougher social-media firm controls, drug pricing, and middle-income tax cuts.

Convergence on these issues may partly reflect a reordering of ideology in both parties. Democrats and Republicans have tilted from the traditional divide between “big government versus big business” toward populism. Table 1 lists some of the more populist-oriented proposals that have been floated by the president and administration officials.

For example, both parties seem to favor a shift from globalization to reshoring of business to the U.S., partially through the use of tax penalties and incentives. Administration policy speeches have suggested a blend of tax incentives to maintain output in the U.S. with threatened tariffs and other penalties on U.S. sales by American multinationals from overseas subsidiaries. Table 1 shows that incentives include a variety of tax incentives for businesses to return manufacturing to the U.S., especially in the pharmaceutical and robotics industries. Biden’s proposals also blend tax incentives to reshore manufacturing with federal spending support for research and development (R&D) and greater federal procurement of U.S.-made goods.

Even the two parties’ proposed tax changes take differing paths to a more populist and progressive tax system. A pre-pandemic hint by the president of a federal income tax cut for middle-income filers might take the form of reducing the tax rate for individuals to 15% from the current 22% on incomes up to $171,050. Alternatively, taxes for this group could be reduced through adjustment of income brackets to lower tax rates for more middle-income households. The Biden proposal also would make the federal tax-rate structure more progressive. Biden’s plan would raise the upper-income federal tax bracket back to 39.6% from the current 37%, add a new payroll-tax bracket for for individuals with incomes exceeding $400,000, and raise capital-gain taxes on top income earners.

Table 1. Parsing a potential Republican platform

Table 1. Parsing a potential Republican platform
Sources: Rocky Mengle, “Election 2020: President Trump’s Tax Plans,” The Kiplinger Report, August 28, 2020; and Erica York, “President Trump Outlines Second Term Tax Ideas,” Tax Foundation, August 25, 2020.

A populist sea change?

Convergence on these issues may signal a shift in traditional party ideologies anchored in Republican support for big business versus Democratic support for labor and big government. Bigger government would seem to have the inside track among traditional influences between the two parties at the moment (supported by proactive fiscal and monetary policy responding to the demands of a post-pandemic economy). Equally important, however, is populism’s impact, either in shaping traditional ideologies or as a force by itself.

The similarities between the two parties’ approaches that we have outlined imply some likely similarities in policy goals. For example, both candidates are likely to expand federal spending on health care and medical R&D to the benefit of Health Care, which is one of our favored sectors. Both candidates are likely to advance income-transfer programs, which should favor the Consumer Staples sector. Both are likely to promote infrastructure spending. This may favor the Industrials and Materials sectors, once Congress establishes the means of financing the spending. And both candidates have committed to bringing manufacturing back to the U.S. We do not favor the Industrials or Materials sectors, because this goal is not as straightforward to achieve as a new federal spending program.

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1 Pew Research Center, July 30, 2020.
2 See www.donaldjtrump.com for full details of the Trump campaign’s second-term platform.
3 Pew Research Center, July 30, 2020.
4 Ibid.
5 “Effects of the Tax Cut and Jobs Act: a Preliminary Analysis”, Tax Policy Center, by William Gale, Hilary Gelfond, Aaron Krupkin, Mark J. Mazur, and Erid Toder, June 13, 2018.
6 “Effects of the Tax Cut and Jobs Act: a Preliminary Analysis”, Tax Policy Center, by William Gale, Hilary Gelfond, Aaron Krupkin, Mark J. Mazur, and Erid Toder, June 13, 2018.
7 The primary deficit is the borrowing requirement generated by spending in excess of revenue. The primary deficit excludes interest cost. For more details, please see “Did the 2017 Tax Cut – the Tax Cuts and Jobs Act – Pay For Itself?”, The Brookings Institution, William Gale, February 14, 2020.
8 “Roundup: Trump-Era Agency Policy in the Courts”, Institute for Policy Integrity – NYU School of Law, August 31, 2020.
9 “Deregulation Under Trump”, the Cato Institute, by Keith Belton and John Graham, June 2020.
10 “Trump’s Deregulatory Successes”, the Hoover Institution, by David R. Henderson, July 7, 2019.

Risk considerations

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Sector risks

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Communication services companies are vulnerable to their products and services becoming outdated because of technological advancement and the innovation of competitors. Companies in the communication services sector may also be affected by rapid technology changes; pricing competition, large equipment upgrades, substantial capital requirements and government regulation and approval of products and services. In addition, companies within the industry may invest heavily in research and development which is not guaranteed to lead to successful implementation of the proposed product. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Some of the risks associated with investment in the Health Care sector include competition on branded products, sales erosion due to cheaper alternatives, research and development risk, government regulations and government approval of products anticipated to enter the market. There is increased risk investing in the Industrials sector. The industries within the sector can be significantly affected by general market and economic conditions, competition, technological innovation, legislation and government regulations, among other things, all of which can significantly affect a portfolio’s performance. Risks associated with the Technology sector include increased competition from domestic and international companies, unexpected changes in demand, regulatory actions, technical problems with key products, and the departure of key members of management. Technology and Internet-related stocks, especially smaller, less-seasoned companies, tend to be more volatile than the overall market.

General disclosures

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