Election 2024 Recap
What the Outcome May Mean for Public Investors & Issuers
By Brian Johnson, Director of Investment Services
and Brian Reilly, Senior Municipal Advisor | Managing Director
The 2024 election cycle is officially over…almost. Donald Trump is again President-elect, and the Republicans will carry a majority in the Senate. The House remains unsettled, although all signs point to the Republicans maintaining a majority in that chamber.
As often happens after every presidential election, our gaze shifts to policy considerations and their broader impacts on the U.S. economy and financial markets, which can prove extremely difficult in an environment where we have a non-consecutive President elect for only the second time in U.S. history and likely single party control over the halls of Congress. Yet, we can delve into how these outcomes may impact the future for governmental investors and issuers.
Before anyone cast a ballot in the 2024 election, there was a general market consensus that the Federal Reserve would continue lowering its target range for the federal funds rate and reduce the size of its balance sheet to the tune of about $60 billion a month. In fact, the Federal Reserve’s Federal Open Market Committee (FOMC) announced a quarter-point cut to the fed funds rate last week to a range of 4.50% – 4.75% and held firm on its imperative to let holdings of U.S. Treasuries and Federal Agency mortgage securities run off.
The U.S. federal government’s deficit for fiscal year 2024 (which ended September 30th) was approximately $1.8 trillion, with every expectation that dynamic would largely continue (if not grow) into fiscal year 2025 regardless of which party held power in Washington D.C. Economic growth has been modestly positive, and inflation has calmed with the Fed’s preferred price measure (PCE deflator) below 3.0% the last four months through September of this year. When all these factors are considered, the outlook for interest rates points towards a normalization of the yield curve. Intermediate and long-term yields have been increasing since mid-September, with the 10-year U.S. Treasury up over 60 basis points during that time (4.39% at the time of this commentary) and the fed funds rate has been cut 75 basis points since its high-water mark.
The market response on the Wednesday following the election was pronounced. All major equity indexes were up substantially. The Dow Jones Industrial Average increased over 1,500 points, or over 2.50%, on the day. The Russell 2000, an index of small cap companies, increased over 6.00%. Similarly, yields for U.S. Treasuries increased on the day (prices move inversely to yields), with shorter terms up 5 – 7 basis points and longer-dated maturities in the 10 – 30-year range up almost 15 basis points, although they’ve all returned to prior levels since then. It’s clear uncertainty played into investor expectations leading up to the election, but since the decisive outcome on November 5th, that sentiment shifted as investors began buying more risk-based assets like stocks and selling safer ones such as U.S. Treasuries.
So, where do we focus relative to what may happen with interest rates? There are two key policy areas where history may not entirely repeat itself…but might look awfully familiar.
Fiscal and Tax Policy: Even before President-elect Trump is inaugurated for his second and final term, the federal government has some major work to do. In order to avoid a shutdown (at least in some fashion) at the end of the 2024 fiscal year, Congress enacted, and President Biden signed a continuing resolution that temporarily funds the government through December 20th of this year. Congress returned from Fall recess on November 12th to complete their work in a lame duck session, with plenty of political gamesmanship ensured. It’s highly unlikely anything beyond another continuing resolution will come out of it.
Next on the docket is the 2017 legislation dubbed the Tax Cut and Jobs Act (TCJA), which includes many tax provisions set to expire at the end of 2025 (for the 2026 tax year). Take that factor, and add President-elect Trump’s various proposals to the equation, and we’ve got a murky outlook. This area of tax policy is more impactful to tax-exempt issuers because the implementation of the TCJA generally increased the value of tax-exempt income through provisions like the cap of $10,000 on the itemized deduction for state and local taxes (SALT). However, part of President-elect Trump’s stated policy prerogatives in this area aim to lower individual personal and corporate tax rates, as well as excluding certain categories of income (tips, social security, etc.) altogether.
Regardless of what happens to revenues to the federal government, there is no recent history of significant reductions to federal spending (setting aside some of the effects of sequestration) by either major political party when in office. Knowing this, it’s safe to assume we’ll see continued budget deficits, which directly correlates to the supply of U.S. Treasuries to fund budget shortfalls.
Economic Policy: To be fair, tax policy is an integral part of overall economic policy. In this context, we’re viewing the economic landscape in terms of the potential for expansion of things like tariffs, curtailed regulatory burdens on business, and the overall level of inflation. While we’ll start President-elect Trump’s term from a fairly strong foundation, tariffs could increase the costs of goods and services and aggressive implementation of them may result in lower economic output, with end user costs increasing at a higher pace than revenues and incomes. In contrast, tariffs also bring revenue to the federal government, and we don’t have a great sense of the interplay of all these things when combined. We have very little definition on what tariffs may ultimately look like in Trump’s next term and corporate supply chains adjusted heavily as a result of the COVID pandemic and implementation of tariffs during his first term. Yet, changes to regulatory policy around natural resource extraction and exportation are also central to Trump’s future agenda and may potentially offset the negative impacts of a broader tariff regime.
With all of these “what ifs” reaching a fever pitch among media outlets and political pundits, it’s important to take a deep breath and remember a few fundamental facts as to where the federal government will sit come January. First, Republicans will not enjoy a filibuster-proof majority in the Senate. Second, many Republication legislators were elected on the very platform of reducing the deficit. Finally, single-party political control typically results in legislative overreach.
So, back to our initial question: Will these outcomes materially change points of view for governmental investors and issuers?
For investors, the reality of an increasingly positively sloped yield curve achieved through declines in short-term rates and steady-to-increasing intermediate and long-term rates signals a ‘stay calm and carry on’ philosophy for portfolio management. For issuers of tax-exempt debt, depending on the path of intermediate and long-term rates, this dynamic may herald the return of refunding activity over the next couple years. Because tax-exempt yields are a function of tax policy, it’s very hard to know exactly what the future holds, but It’s a safe bet we won’t see any measures that would be perceived as increasing the deficit, like the return of tax-exempt advance refundings or an increase to the $10 million bank qualification limitation. On the other hand, we might see a resurrection of direct-pay bonds like the prior bouts of Build America Bonds and the various Recovery Zone obligations under prior administrations.
At Ehlers, we continuously monitor policy and market information to determine how it will impact public funds issuers and investors. We expect to gather additional insight and a higher level of clarity as we settle into the next calendar year and actual pieces of legislation are introduced and analyzed. If you’re interested in discussing specific opportunities for your entity, please reach out to your Ehlers advisor to learn more.
IMPORTANT DISCLOSURES: PLEASE READ
Ehlers is the joint marketing name of the following affiliated businesses (collectively, the “Affiliates”): Ehlers & Associates, Inc. (“EA”), a municipal advisor registered with the Municipal Securities Rulemaking Board (“MSRB”) and the Securities and Exchange Commission (“SEC”); Ehlers Investment Partners, LLC (“EIP”), an SEC registered investment adviser; and Bond Trust Services Corporation (“BTS”), a holder of a limited banking charter issued by the State of Minnesota.
Where an activity requires registration as a municipal advisor pursuant to Section 15B of the Exchange Act of 1934 (Financial Management Planning and Debt Issuance & Management), such activity is or will be performed by EA; where an activity requires registration as an investment adviser pursuant to the Investment Advisers Act of 1940 (Investments and Treasury Management), such activity is or will be performed by EIP; and where an activity requires licensing as a bank pursuant to applicable state law (paying agent services shown under Debt Issuance & Management), such activity is or will be performed by BTS. Activities not requiring registration may be performed by any Affiliate.
This communication does not constitute an offer or solicitation for the purchase or sale of any investment (including without limitation, any municipal financial product, municipal security, or other security) or agreement with respect to any investment strategy or program. This communication is offered without charge to clients, friends, and prospective clients of the Affiliates as a source of general information about the services Ehlers provides. This communication is neither advice nor a recommendation by any Affiliate to any person with respect to any municipal financial product, municipal security, or other security, as such terms are defined pursuant to Section 15B of the Exchange Act of 1934 and rules of the MSRB. This communication does not constitute investment advice by any Affiliate that purports to meet the objectives or needs of any person pursuant to the Investment Advisers Act of 1940 or applicable state law.