What Does Donald Trump’s Win Mean for the Economy
The 2024 U.S. presidential election was a close race – until it wasn’t. Donald Trump leaned on a variety of themes that resonated with voters, particularly around the economy, and is now projected to secure a second term in the White House. Republicans also won control of at least one chamber of Congress.
Stock markets surged following the definitive election outcome, but investors are still assessing how Washington’s new political landscape will impact the economy and markets. To shed light on that question, BMO hosted The Election Effect: What’s Next for the Economy, Markets, and Interest Rates, a panel discussion featuring:
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Camilla Sutton, Managing Director, Head of Equity Research, Canada & UK (moderator)
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Doug Porter, Managing Director and Chief Economist
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Brian Belski, Chief Investment Strategist
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Ian Lyngen, Managing Director and Head of U.S. Rates Strategy
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Here are some of the key takeaways.
Strong market reaction
The strong initial market reaction to President-Elect Trump’s win provides some clues to what markets anticipate for the next year, explained Doug Porter. “Fundamentally, we’re looking at some upside risk to growth and inflation, a little bit of a stronger U.S. dollar, perhaps a wee bit less Fed easing than would have otherwise been the case,” he said.
Porter explained that another reason for the immediate positive market reaction is the view that the 2017 tax reform will be extended and the new administration will likely adopt a lighter regulatory touch. That would benefit the financial sector in particular, he added.
When Trump takes office in January, he will inherit a fundamentally strong economy with GDP growth hovering around 3% for the past year, which is ahead of the long-term average and above the consensus estimate. Meanwhile, inflation is close to the Federal Reserve’s target range, while the unemployment rate is at a healthy 4.1%.
The one “sour” reaction to the election results has been in the bond market, where yields have risen, said Porter, adding the $1.8 trillion budget deficit could also weigh on bond markets.
Tariffs and taxes
Taxes and tariffs were key parts of Trump’s successful campaign. Still, there was consensus on the panel that the rhetoric from the campaign could be very different from the reality of policy that emerges over the next few years. Porter expects the next Trump administration to adopt a lighter touch on the taxation front while putting the focus on tariffs.
Although a 10% tariff on all imports would be significant, a number Trump proposed on the campaign trail, Porter and Ian Lyngen shared the view that the tariffs may not trigger runaway inflation. He said it would depend on how nations reacted, adding that a stronger U.S. dollar could offset some of the inflationary effects.
“Tariffs aren’t necessarily reflationary,” said Lyngen. “In fact, they could be a bigger drag on global growth.” In his view, Trump’s immigration policy could have broader implications for the U.S. economy as employers struggle to fill vacancies.
Although Trump has often mentioned tariffs being a feature of his trade policy, Porter expects his focus to be mainly on China. “I do not take the threats of heavy increases of tariffs on China lightly at all,” he said. “I don’t know about a 60% tariff, but I would not at all be surprised if we are looking at a significant increase in tariffs on China in the years ahead.”
The Fed and Bank of Canada
Lyngen expects the Fed to cut rates again in December and then move to a quarterly cadence of 25 basis point cuts in 2025.
Still, there are two ways the election outcome could result in either a slower return to normal or a lengthier pause by the Fed, explained Lyngen. One way is to introduce significant tariffs and fiscal reforms, although Lyngen feels that path is unlikely. The other way would be if the equity market continues to rally further from here, which could be unwelcome from the perspective of monetary policymakers as it could constrain their options and create asset bubbles, he explained.
Although the Bank of Canada (BoC) has said it is not concerned with a policy gap with the Fed or the near-term effects on the dollar, Brian Belski noted that could change if upside risks for U.S. growth and inflation cause the Fed to be more cautious in terms of their rate-cutting cycle.
While Porter agrees with Belski’s assessment, he said BMO maintains the view that the BoC is on track to make a series of 25-basis-point cuts, ultimately taking the overnight rate down to 2.5% by mid-2025. “Fundamentally, that’s one of the reasons why the Canadian dollar has come under pressure.”
Market impact
Despite the market’s reaction to the election, Porter and Belski downplayed the impact that politicians have on the economy. “At the end of the day, politicians do not drive the economy,” said Porter. “Fundamentally, there are 160 million Americans getting up every day and going to work and a little over 20 million Canadians – that’s what ultimately drives the economy. It’s not the political backdrop.”
The reason markets have been so strong has everything to do with fundamentals, said Belski. “In my 35-year career, I’ve never seen certain areas of the market look so sound in terms of being able to understand how earnings look, balance sheet strength, debt-to-equity levels, operating income and things like return on equity, return on assets.”
Against that backdrop, Belski said his team remains very bullish on the U.S. and, by extension, Canada. “As America goes, so goes Canada,” he explained. Currently, Belski said that both the S&P 500 and the S&P/TSX are on pace to hit their targets of 6,100 and 25,000, respectively.
“Canada is a true stock pickers market,” he said. “If you take out the biggest 60 companies in Canada, Canada is really a small mid-cap index.”
More broadly, with interest rates coming down and growth moderating, Belski is hopeful investors will experience fewer days of the wild, volatile swings in markets.
For those anxious about what the election means for their portfolio, Belski said you have to focus on the facts, not what pundits say on the news. “Don’t ever invest in noise or emotion; invest in the facts,” he said.
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>> CAMILLA SUTTON: Good afternoon, everyone. As we woke up this morning, markets were definitely already moving on the news that the projected winner of the 2024 U.S. election is Donald Trump. A historic moment, so we wanted to take some time to answer how this new political landscape in Washington is going to affect the outlook for both the economy and markets. I'm Camila Sutton, I'll be moderating today's discussion. So to get started I thought I would start by introducing our panelists. So Doug Porter, Managing Director and our Chief Economist here at BMO. He's going to give us his views what this administration means for the economic prospects for Canada and the U.S. Brian Belski, Chief Investment Strategist at BMO Capital Markets and Brian is going to walk us through what the new political leadership really means for financial markets. Ian Lyngen, Managing Director and Head of US Rates Strategy. He will provide us a rate perspective from the land of U.S. rates. Doug let's start with you. Last week you published talking points titled the next president's rude welcome. Maybe if you can walk us through what this 47th president of the U.S., what he inherits.
>> DOUG PORTER: Sure thing Camilla and welcome everyone. It's clearly not a rude welcome with the S&P 500 at record high. I think part of the reason why the markets are so buoyant is the economic back drop that the president is being welcomed by. Frankly it's healthy. GDP growth has been almost 3 percent in the past year, better than consensus expected, better than the long-term average. At the same time we've actually seen inflation come down towards 2 percent. Not quite there. Almost there. A big, big change from where we were one and certainly two years ago, and finally while we've seen a bit of deterioration in the job market the unemployment rate 1.1 percent is in line with what the Fed uses as natural. It's a fairly healthy economic back drop that the president is inheriting. What I was referring to was the fiscal back drop. The one sour reaction we've seen in the markets over the last 24 hours has been in the bond market, we have seen in backing up in yields. Part of that is we're looking at some upside risk to growth, a little bit of upside risk to inflation, but I also think it partly reflects the ongoing fiscal concern. Government debt to more than 95 percent of GDP for a little perspective, it was as low as 35 percent as recently as 2007. So that's serious deterioration in a relatively short time. When we look ahead this may be the one break or a possible break on some of the president's aspirations in the years to come. This fiscal back drop. Having said all that I'm still relatively confident with the momentum in the economy that we're still looking at roughly 2 percent growth next year. If anything I think some of the policy changes we are looking at could put a little upside on that, and I do believe we're likely looking at inflation in the low 2 percent range. So even with misgivings on the fiscal front I think overall the economic back drop is still relatively positive.
>> CAMILLA SUTTON: We're going to dig into a lot of those on today's call. Brian, let's get you in on the market side. As president elect Trump steps into the presidency, give us the back drop of markets.
>> CAMILLA SUTTON: Good afternoon, Brian. I'm going to leave you be for a second. I think you're frozen on my screen. We will turn it over to Ian quickly here. Can you walk us through a big jump in rates leading to this election. Do you want to lead us through before we get to where it looks like we're going with rates, where are we today and where have we come from?
>> IAN LYNGEN: We have seen a remarkable repricing in the treasury market over the course of the last several weeks in the runup to the election. It's important to keep in mind that a good portion of this repricing came in the form of higher break-even rates, so it's largely a reflationary trade. Yes there's been return to positive return premium in a couple benchmarks, and we expect that will persist. But as a theme, what we did was we priced in a Trump victory, but we didn't necessarily price in what appears to be a red sweep or the generally strong performance of the Republican party in Congress. So that additional 15-20 basis points that we have seen over the course of the last 24 hours reflects in part some of the fiscal concerns that Doug outlined, but it also is reflective of our taking a step back to see how things were going to play out. We came into this week unsure if we would have a clear decision by this point today, if not the weekend or could drag on even a bit longer. That was the fear. Fast-forward to this period. We have a lot of confidence in the results, we have a lot more information than we might have otherwise assumed, and that in and of itself represents the passing of a key event risk. And when we look at something as detailed as the reception to today's 30-year auction, the auction went well. It went well at comparatively high rates, and we're looking at that as a vote of confidence in treasuries as an asset class as opposed to any particular indication of the markets perception of the election outcome. There is one caff why the that I would add in today's auction results, and that is historically the 30-year sector has not been a benchmark in -- benchmark in which foreign participants were not particularly active. The 10-year sectors, 5-year sectors, those typically have been the go-to for overseas buying. If we're worried, and I think this is a background concern that a lot of people in the market have, that overseas sponsorship will step back as a result of Trump 2.0, I think we need to go over the next auction cycle over the course of December, to be a good judge of that going forward. Our first thought is it won't. But it's certainly something to keep an eye on.
>> CAMILLA SUTTON: Doug, let's circle back to you for a minute. Can you walk us through the policies that are going to be the most closely watched. Obviously there's a difference between what is said on the campaign trail and what actually gets enacted. From an economic point of view, what will be most closely watched?
>> DOUG PORTER: I think you make a good point, the policy rhetoric could be different from the policy reality. But the two things from an economic standpoint that we're watching most closely are tariffs and taxes. Let's start with taxes. I think this is part of the reason for the very positive equity market reaction today. Of course Mr. Trump has leaned into all kinds of different potential tax cuts. First and foremost I think it's clearly the tax reform of 2017 in this environment will be fully extended. That's a big ticket item. I don't think there was any question that quite a bit of it would be extended regardless of who won. But with Republicans pretty much in control it looks like we will have a full extension on that. Above and beyond that. Mr. Trump talked about a possible reduction in corporate taxes, things as diverse as removing taxes on tips. All kinds of different pledges made throughout the campaign. We will have to wait to what extent and over what time period these things are enacted in the years ahead. I think it's fair to say generally we're looking at a lighter touch on the taxation front. Before I move to tariffs another important point to make and another reason for the market's positive reaction is there will be a have you there will be lighter regulatory touch. The financials benefit from that. Beyond taxes the other big force, of course, is on tariffs. Frankly, this is one that we just do not know the extent to which these policies will be enacted. There is a widespread view that the bark is much worse than the bite on this front. That was certainly the case in the first administration of Mr. Trump. But we are talking about a very loud bark here. A 10 percent tariff on all imports would be quite significant. I'm of the view that it's not as inflationary as some make it out to be. First, we have to see what the responses are among other nations but you probably get a much stronger U.S. dollar. We got a little taste of that overnight. That will offset inflation and growth standpoint. But from economic end those are the two big things we are focused on, tariffs and taxes.
>> CAMILLA SUTTON: Thank you, Doug. Brian, you're back with us here, so why don't you give us some high-level thoughts in terms of where we are with markets, where we look to be as we walk into this new presidency.
>> BRIAN BELSKI: Thank you Camila. Thank you, everyone for your patience, it is an honor to be here. Sometimes life can be excessively humbling, just like what happened to me. Don't let this dissuade you from buying technology stocks by the way. As you may or may not know we've been bullish for a long time. Let me walk you back to get forward, walk you back to get forward. We've been at BMO for almost 13 years now, and we brought to BMO is specific call on the U.S. stock markets saying that U.S. stocks entered a secular bull market in 2009. We've been resolute with that call our entire time at BMO, not because we're stubborn, but because we firmly believe it. Doug did an amazing job teeing this whole thing up, saying that on a fundamental basis the reason why the markets have been so strong, because fundamentally the economic back drop tunnels through the economic back drop. I've been doing this almost 35 years, and I love to say in my collective career I've never seen the market look so fundamentally sound in terms of earnings discernability. Balance sheets, debt-to-equity levels. Things like return on equity and return on assets. We remain very bullish. In this cycle of longer term trend we've had down periods called cyclical bear marks, we have come out of one in 2022. We are now in year three of the cyclical bull that brings us into 2025. We remain positively disposed. We never want to give politicians any credit with respect to the stock market. We've done oodles of research and published on that and say that politics have nothing to do with the performance of the stock market. We've talked about some policy things, but we need to get the government in place. In the meantime, I will caution everyone, and I'll leave you with this Camila, that Canada comes along for the ride. As America goes, so goes Canada because of the proximity of our countries, in terms of how we're intertwined fundamentally. But remember that investors are too focused on the market overall. Remember, the market stands for the stock market. The stock market is a market of stocks, and the more defined you can be in terms of your investment styles, in the more that you are defaulting to looking at companies -- what stocks are -- versus trying to make a market call, you can avoid some of this silliness in terms of the volatility. Worrying whether the market will be up, down, or sideways the next day or two.
>> CAMILLA SUTTON: How does it look, Brian, for Canada versus the U.S. Outperformance in one or the other countries or the same across the board?
>> BRIAN BELSKI: We've been quite vocal about Canada's performance the second half of the year. We think there’s a very good chance that it can filter over to 2025, especially as catch-up and volatility that we're seeing in developed markets including Europe, the continued volatility of China. Remember as America goes, so goes Canada, and as we enter and increase the velocity of the importance focusing on stocks versus the market, Canada is a true stock pickers market. If you take out the biggest 60 companies in Canada, Canada is really a small mid cap induce. So what we've been are small cap markets. So the life bread of the U.S. economy, we never discount the U.S. or Canadian consumer. But it's small and medium companies. Canada has a lot of great companies. We provide the value relative to the U.S. will provide more money into Canada. We've seen flows there. We think Canada from a fundamental perspective is very well positioned to do quite well relative to the U.S. Doesn't mean the U.S. is going to perform. We think the U.S. will do very well, but we think Canada is positioned to do even better.
>> CAMILLA SUTTON: Perfect, Brian, Ian, let's get you back in on this. You've given us a quick overview in terms of the bond market. There are a whole host of questions coming in about what it means for yields and why. Tomorrow we have Fed day. Fed is obviously independent. Powell's term extends until 2026. But really, what does this mean for the Fed. and how will the Fed interpret this?
>> IAN LYNGEN: I do think there will be a lot of focus on monetary policy in the near term. There's this subset in the market that believes that the Fed. is going to be responsive to the presidential election results. I'm a bit skeptical of that. I think that we have at least two more rate cuts this year, tomorrow 25 basis points and then on the 18th of December. To a large extent, those are simply follow-through on the Fed.'s prior signaling. When we get into the first quarter of 2025, I suspect we probably shift into a quarterly cadence of 25 basis points, so that means skipping January, going in March, and assuming that pattern going forward. There are two ways, however, in which the Trump victory could translate into either a slower terminal in terms of the downside of the progress back to normal, or a lengthier pause. The first is in the event that Trump starts to implement very significant tariffs and fiscal reforms early in the process, given the way Congress works I see that a bit unlikely. But if he were able to pull it off early, I think the Fed would look to the data in the second half of 2025 from the perspective of it being potentially more limiting on normalization, i.e., a longer pause. Now I agree with Doug that tariffs aren't necessarily reflationary. They could be a bigger drag on global growth but there are others on this platform that could be. One thing we haven't touched on is immigration. Slowing the influx of laborers could have longer to medium term implications and the scarcity of labor and tightness of the job market. That's a component that we're concerned about. And then the other way in which the election results could impact the Fed would be through the channel of financial conditions. If Brian's right and the equity market continues to rally further from here, that will ease financial conditions even further, which could be unwelcome from the perspective of monetary policy makers, again, depending how the economic data plays out. If anything, I think that reinforces the January pause narrative and to some extent it does put a less normalization focused messaging on the table from Powell tomorrow afternoon.
>> CAMILLA SUTTON: Doug, from the Canadian side, does it impact the Bank of Canada?
>> DOUG PORTER: I think at the margin it may lead them to be a wee bit more cautious. It's interesting in the deliberations that we saw the other day they talked about the 50-basis point cut they just enacted and the possibility of more. They specifically said that they didn't want it to send an incorrect message. In recent commentary they actually said they could cut 50 basis points again. I would suspect this might put a bit of chill into the Bank of Canada. First of all the sustained weakness in the Canadian dollar in recent months alongside the view that the Fed. just might be a little more cautious in terms of their rate-cutting cycle. We have upside risk for growth and inflation. I think at the margin this injects a little more caution into the Bank of Canada. Having said that we're still of the view that they're on a path. We're still looking for a series of 25 basis point cuts from the Bank of Canada, which will ultimately take their overnight rate down to 2.5 percent over the next year. That's half of where we were as recently as this year. The Bank of Canada has been in the lead globally in terms of rate cuts, 125 basis so far and counting. Fundamentally that's one of the reasons why the Canadian dollar has come under some pressure. I don’t think it fundamentally changes the Bank of Canada, but I think at the margin it just puts a little more caution in terms of how quickly they will bring down rates.
>> CAMILLA SUTTON: Any level of the Canadian dollar that matters to the Bank of Canada as we see the weakness having taken place dramatically?
>> DOUG PORTER: The Bank of Canada likes to say there is no specific level they are targeting or aiming for. I think they will get a little uncomfortable if it goes well through 140. But you know, Malcolm has suggested time and time again it's not entering into their deliberations just yet. The spread between Canadian and U.S. interest rates is not at its limit. It's to me a laissez-faire attitude they've taken towards the currency. I wouldn't be surprised if it remains under pressure the next couple months.
>> CAMILLA SUTTON: I can tell there's a whole handful of questions about trade. Do you want to dig a little bit into the impact of trade, both Canada as well as China? What does it really mean?
>> DOUG PORTER: I think specifically for Canada, of course, this is the biggest concern, I would say with this election. We have the USMCA coming up for review, and Mr. Trump has already indicated that equals renegotiation. Most of his focus has been on Mexico in particular. When you look at the trading partners wits the U.S., Canada-U.S. trade is better balanced than any of the other trading partners with the U.S. But still, I think the uncertainty alone is a bit of a cloud over the Canadian economy. The one thing I would point out, though, if you think back to Mr. Trump's first term from before COVID, from 2017 to 2019, even with the NAFTA renegotiations and all the uncertainty around trade at that time, the U.S. economy managed to grow by 2.8 percent and during those years the Canadian economy grew 2.5 percent. Healthy solid peace, even with all the trade uncertainty. So yes, it is a cloud, but I don't think we should lose sight of the fact that ultimately the most important factor for the Canadian outlook is the health of U.S. economy itself. That is the number one driver for Canadian growth. I think for the most part the major focus of the trade measures that Trump will be looking at will be mostly China first and foremost and then Mexico. I think he's serious on those two fronts. In the case of Mexico I think it's more a form of leverage, the kind of tariffs that he's talking about. We will see whether any of these are in fact enacted. In China we've already seen from the first administration and even from the Biden administration they mean business. I do not take the threats of heavily increased threats of tariffs on China lightly at all. I don't know about 60 percent. But I would not be surprised if we are looking at a significant increase on the tariffs in China in the years ahead.
>> CAMILLA SUTTON: Brian, you've given us some overviews in terms of markets. Can you be a bit more specific in terms of where you look out for this coming year, what specific sectors you think we will see, and particularly maybe focus a little bit on some of your earlier comments about the mid cap versus large cap?
>> BRIAN BELSKI: Yeah, I would love to. Thank you. You know, we believe that normalization is a broader trend from the next 3-5 years. We actually started talking about it two years ago and I think the best chance for normalization comes in the next couple years. Especially if you go back and listen to what Ian said about rates and what Doug has said about growth. I think the days of these wild, volatile swings in markets, up 20, down 20, hopefully will come to an end. That's not normal to be like that, nor is it normal to be at severe 0 percent interest rates. Be that as it may, we published an initial -- that being the S&P 500 proper index in the United States. Increased to 5600 in May and then to 6100 year end. In September it's rare that we increase a market target like that in September. I've done it twice in my career. So the bull market conviction remains strong. We're overweight in the United States from our sector positions and the research we published at BMO on behalf of BMO capital markets, technology and financials. We obviously think financials is the pick to click today, quote unquote. I think the reason for that and why you see this massive outperformance is the massive underperformance of financials this year. The massive institutional perspective non-positional holdings of financials. We think from a fundamental perspective, across the board both the U.S. and Canada by the way, financial sector earnings are way understated. I think, too, something that Doug talked about, President Trump is going to be excessively active in regulations, meaning taking regulations out of the market. And that's a big bid for financials. So we've been resolute on financials, bullish for a long time. We think protecting financials, you want to be over Wyeth into the end of the year. We are publishing our 2025 forecast in a couple weeks, don't want to steal that thunder. In Canada we've been overweight more sectors in Canada. That says something, number one. Number two, going back with respect to opportunities, it's technology companies, it's financial companies, which oh, by the way, have really not been liked in Canada. But over the last six months the financial sector in Canada is the best performing sector. I think some of the negativity surrounding Canada has been too much. Lastly, we love the consumer in Canada. All you have to do is lock into a -- walk into a dollar rim store and stand in line with anybody else. That company is amazing. But another great example is RITZIA look at that stock chart. Why are you worried about the Canadian consumer? Look at those two stocks. Lastly, think differently. It's called being contrarian. There are other good yields like REITs in Canada and some utilities. But we think there is an opportunity on so much negatively with so many of the great telecom companies in Canada. We think over the next six weeks we think the S&P 500 has a very good chance to make it very close to our 6100 target, not to mention our brand-new price highs we've then in the TSX that people have been doubting as well. Our target for the TSX is 21,500.
>> CAMILLA SUTTON: Terrific, Brian. Why don't we spend a minute summing up everybody's views. Ian, Brian, Doug, we've talked through quite a lot here. But it might be worth spending a minute or two summarizing what you feel in your field of expertise in the year ahead, now that we have president elect Trump. Ian?
>> IAN LYNGEN: I'll kick it off. Generally speaking, we do expect the Fed to continue the process of normalizing rates. Perhaps with not as much conviction, given the amount of uncertainty that's now been introducing into the outlook. Ultimately, however, what the Fed has done over the course of the last three years is it has made it clear that it has the commitment and the tools in place to reestablish price stability. And if we think about the pandemic experience, the U.S. saw decade-high levels of inflation, but that only transferred to to Fed. funds getting as high as 5 and a half. Going forward, I think most investors in the treasury market look at that as most likely upward bound in the event of inflationary spike. Now given whether Trump administration will truly be reflationary or growth back at a moment where the Fed is fighting back from inflation, I think we're going to see rates in a remarkably familiar zone. We are now up against that 450 level in ten-year yields, which I expect will ultimately prove to be a good buying opportunity and I anticipate by the end of the year we will be closer to 4 percent and spend much of 2005 in a range between 350 and 425, give or take. The more interesting aspect will be what happens on the very front end of the curve. We came in this year assuming a cyclical steepening of the curve would be the extent. That came to fruition. That's our bias for next year with the caveat that the second half of the year is going to be quite a bit of wild card given the fact that the Fed, treasury department will need to increase issuance, auction sizes, and that's going to weigh on treasuries as a whole. Present I of cross-currents, but we're not on the edge of a true repricing into sustainably higher yield territory in the years ahead.
>> CAMILLA SUTTON: Brian, do you want to fill in from your side?
>> BRIAN BELSKI: Sure. Just remember one thing. Control what you can control. What does that mean? I think many investors that we spoke to across the world on an institutional basis in our wonderful people at high net worth were waiting to what was going to happen with the election. Don't let things like that control you. They are not fundamental elections. You know what are fundamental? Companies, what they do, how they are led, how much money they make from a product or service. How that product or service is valued. What does it mean in the construct of longer term themes, whether it's water or AI, or power or food. There are a lot of things you can control and how you control it is buying the best assets. We continue to believe that the United States stock market is the best asset in the world. Canada is not too far behind. We think in the United States it's not just all about tech stocks. Yes, you should own those, but you should also diversify up and own value and dividend growth strategies and small mid cap. Small mid cap is the most valuable in relative to large cap that we've send in our career in an under own asset. If you use hockey analogy, you want to skate to where the puck is going. It's going to more broader performance in the stock market across the United States. That holds true for Canada. Canada has been an unloved asset. Negatively heading into this year, but a surprise outperformer. We believe too many people were emotional and not looking at fundamentals. We think controlling what you can control and buying good assets and being a stock picker, you're going to do very, very well with respect to shutting off the noise and really focusing on what you can control.
>> CAMILLA SUTTON: Doug, do you want to bring us home here?
>> DOUG PORTER: Sure thing. I think the market reaction we've seen today basically tells you where the risks lie in terms of the economic outlook over the next year. Fundamentally we are looking at some upside risk to growth and inflation. A little stronger U.S. dollar, perhaps aweless Fed. easing than what would have otherwise been the case and somewhat higher yields. I don't want to overplay it. That's Wall Street's play book. We saw in 2016, earlier this summer when it looks as if Trump was in a strong lead. That's the initial response. I'm not sure that's the correct answer over the next few years. I just want to play off something that Brian has been hitting on. That's ultimately at the end of the day, politicians do not drive the economy. I'll end by quoting Richard Nixon who said the U.S. economy is 100 million Americans getting up every day going to work. Now it's 160 million. And for Canada, it's over 20 million. That's ultimately what drives the economy, not the political back drop.
>> CAMILLA SUTTON: Perfect. Before we move into Q&A. Let's play a little round of rapid fire. Each of you get one word to answer. We're going to go in order. Doug, Brian, then Ian. The time frame will be the ends of 2025, so essentially a year and a bit from now. We'll start with growth. Is U.S. growth above or below 2.6 percent.
>> DOUG PORTER: I can't believe I only get one word here. Below.
>> CAMILLA SUTTON: Brian, you're right after Doug and then Ian.
>> BRIAN BELSKI: Same question, Doug is the economist and I'm the American, so I'm going to say above.
>> IAN LYNGEN: And I go with below.
>> CAMILLA SUTTON: Interesting. What about on inflation? U.S. core inflation, above or below 3 percent?
>> DOUG PORTER: Below.
>> BRIAN BELSKI: Below.
>> IAN LYNGEN: Below.
>> CAMILLA SUTTON: Unemployment. U.S. unemployment moves higher or lower from here?
>> DOUG PORTER: Tough one. Slightly higher.
>> BRIAN BELSKI: Lower.
>> IAN LYNGEN: Much higher.
>> CAMILLA SUTTON: A lot of different opinions there. What about the U.S. ten-year yield? Higher or lower?
>> DOUG PORTER: Slightly lower, since we've had such a reaction today.
>> BRIAN BELSKI: Same.
>> IAN LYNGEN: Lower, as well.
>> CAMILLA SUTTON: And U.S. equities? Going to see them higher or lower about a year out?
>> DOUG PORTER: Brian is following me, I've got to say hiker.
>> BRIAN BELSKI: (laughing) higher.
>> IAN LYNGEN: I listen to Brian and say hiker.
>> CAMILLA SUTTON: We've had questions about this one. For now one word, U.S. dollar stronger or weaker against the G10?
>> DOUG PORTER: I'm going to say weaker.
>> BRIAN BELSKI: Same.
>> IAN LYNGEN: I'm going to take the other side and say stronger.
>> CAMILLA SUTTON: What about global geopolitical tensions? Eased or worsened by the ends of 2025?
>> DOUG PORTER: Can get better? I will say actually worsened.
>> BRIAN BELSKI: Eased.
>> IAN LYNGEN: Eased.
>> CAMILLA SUTTON: U.S. corporate taxes, higher or lower?
>> DOUG PORTER: Lower.
>> BRIAN BELSKI: Lower.
>> IAN LYNGEN: Lower.
>> CAMILLA SUTTON: What about U.S. immigration reform? Has it made progress?
>> DOUG PORTER: At the margin, marginally.
>> BRIAN BELSKI: That's not one word. Yes.
>> IAN LYNGEN: Yes.
>> CAMILLA SUTTON: Terrific. Thank you all for the beginning half of this. We're going to move now into questions. We've received tremendous number of questions, both before and also during. The questions just keep coming. One of the pieces we haven't did you go into and there have been a lot of questions on it, I'll let any of you answer, though Doug, it's probably aimed at you. In terms of the state of the global geopolitical situation, is there immediate impact or is this something we see playing out over the year? How does it unfold from here?
>> DOUG PORTER: Well it seems like I'm the bear on the geopolitics because it's going the one way for the last several years. I don't think anything changes on that front immediately. Mr. Trump talked about ending the Ukraine war almost instantaneously. I think Ukraine and Europe has some say in that. So I think this is something that plays out over the next couple years. I don't see a rapid change on that front on the geopolitical side.
>> CAMILLA SUTTON: We have lots of questions in here about the potential of the unpredictability of what we have seen from Trump previously. How do markets deal with that kind of unpredictability?
>> BRIAN BELSKI: I'll take that one. Why are we going to give anybody any credit? I think that was a failed strategy for his first term, it will be failed strategy this term. You have to just try your best to separate feelings from facts. Feelings from facts. Turn off the television unless Doug or myself or Ian are on, and it's all a bunch of noise. So don't ever invest in noise or emotion, invest in the facts. So rhetoric on both sides has been at all-time highs. Rhetoric and information flow is at all-time high. Stick with your strategies, control what you can control.
>> IAN LYNGEN: And if I could quickly add to that, I do think that we spent a lot of Trump's first term trading off of the information flow, as Brian points out. I'm sure we'll be back to the social media posts and following environment as a market, but I don't think that we will take them with the same market implications as we did during his first administration. I think the market has become a bit more critical of reading some of those as simply rhetoric, as opposed to real actionable policy ideas that are going to come to fruition. So from that perspective, it might be a bit of a calmer time in the market than his first term.
>> CAMILLA SUTTON: There's quite a few in year. Maybe these are for Ian as well, really around the deficit. Why would it matter now when it hasn't seemingly mattered for so many years? Drug drug well the old saying is the budget deficit doesn't matter until it matters. You don't want to get to the point where it does matter. We have seen other countries go through this. Of course the U.S. is somewhat special on this front. You do not want to get in a position where you are forced to be making fiscal changes because the market is forcing it upon you. That happened in Canada in the mid 1990s, arguably happened in the UK. I appreciate the U.S. is in a very different position from smaller economies. But you do not want to get into a situation where the bond market is forcing fiscal changes upon you. I would assert that in the last year or so. We have had flashes of concern in bond market about the fiscal back drop. It hasn't been sustained, hasn't lasted long, but there have been some episodes where it certainly felt like yields are leaning higher because of the concern over the fiscal back drop. What I would say is different this time. We are dealing with debt to GDP we have not seen since the ends of World War II. And at that time the U.S. was about to embark on massive economic boom. We are not looking at economic boom in the next 5-10 years. Solid growth perhaps, but not a boom. Coupled with that we've got much higher real interest rates now and less favorable demographics as well. Which I think put us in a bit of a tough fiscal bind in the years ahead. That's more so for places like Europe and Canada as we go ahead. But the short answer is what I said at the start. You don't want to find yourself in a situation where you find you have pushed your luck and gone too far.
>> CAMILLA SUTTON: Ian, do you want to fill in a bit as well?
>> IAN LYNGEN: Yes, I would like to actually address the episode that we saw in sent or October of 2023, and that was one of those flashes of concern on the part of markets (september or October). We saw a very significant back-up in treasury yields that was accompanied by a return on of positive return premium all because the treasury department increased throughout the curve and it signaled it was going to do more. We then saw a relatively quick unwind, some of the upside we had seen in equity prices. Equity pulled back on higher rates. What I find fascinating was this is the moment in which yellen chose to effectively blink at the market's reaction to the treasury department's borrowing needs and instead of following through with auction size increases previously signaled, they brought the treasury department announced slightly smaller auction size increases and very quickly stabilized in 2024. We're now to the point where the treasury department, even though as we all agree on this call, deficit spending is going to increase, they are still messaging that coupon auction sizes are going to stay stable for at least several more quarters. So that means that a lot of the deficit spending is going to be absorbed in the Bill market, and as the Fed cuts rates the Bill rates are obviously going to follow almost 1-1. So the funding have this deficit spending becomes less onerous if it's largely being done in the Bill markets than the optics might have otherwise implied. Given the share of deficit spending that can be attributed to interest on the federal deficit, I think this is part of the forward projection that yellen made to some extend the FOMC are considering when they look at the deficit and as Doug pointed out, all the risks that creates once you lose control further out the curve. So the policy makers in the U.S. are certainly cognizant of this.
>> CAMILLA SUTTON: Since we have you here, Ian, there are questions about your U.S. unemployment views. If you want to spend a minute talking about them and then maybe Doug, over to you to fill in from your side. >> IAN LYNGEN: So we're at this point where the Goldilocks economic narrative, everyone appear toss have bought into it. To be fair, GDP growth continues very strong outperforming expectations. Inflation is moderating perhaps with some pockets-of-being stickier than expected and the unemployment rate. As Doug noted earlier is effectively at the neutral rate or natural rate of unemployment. So why, then, would I be more concerned that a year from now we won't be at 4.1; instead we'll be at 5.1 or higher? That's because I still think that the amount of policy tightening that occurred over the course of the 13 months the Fed was at terminal has yet to fully work its way through the system. Once we start to see consumers making more difficult tradeoffs and some sectors being hurt more than others, we will see there are layoffs to be realized and there would be a point in which the market stops punishing firms for laying off employees an starts we warding them. When that occurs we look around and see there are plenty of firms that have a couple, ten, 20,000 people to lay off, and that has a tendency to snowball on itself. The caveat, is that the som rule may not work this time, SOHM rule. So we might not see that typical spike. I was looking at this earlier today. There are two episodes we went above .5 and one back below. One was in 1969, the other 1974. Both periods looked like we might be able to create something of a soft landing but subsequently saw that spike in the unemployment rate. So I am wary that there's still trouble brewing in the U.S. employment market.
>> CAMILLA SUTTON: Doug, anything to add in from your side?
>> DOUG PORTER: So one thing I would say, first of all, we have seen a modest back-up in the unemployment rate with 3 percent growth. Unlike the rest of the world we've had very strong productivity growth in the U.S. in the past year. Most of the rest of the world and especially here in Canada we've been struggling with productivity growth coming out of the pandemic. The downside is we've had somewhat more modest job growth in the U.S. given the extent of GDP growth over the past year. Looking ahead, even though I said there is some upside risk to growth, from a baseline that's lower than in the past year. So we are participating a further rise in the unemployment rate. Based on where we're looking at the risks of growth and that's to the upside of the next year, we are actually considering modestly bringing down unemployment rate forecast over the next 12 months, still a bit higher than than now, but not much. I'm pleasantly surprised how the unemployment rate backed off after a scare this summer when it shot up.
>> CAMILLA SUTTON: Brian, we have a couple here for you. Not sure they're fair. Any thoughts in terms of what this means for digital currencies or crypto currency?
>> BRIAN BELSKI: There's not fair because we don't cover it fundamentally at BMO, nor do we have an official opinion on that. So I probably should not be commenting on that. Peripherally, we know that President Trump has talked about his positive feelings on crypto, so to has one of his most recent advisors, real onmusk. We'll leave it at that. Elon musk.
>> CAMILLA SUTTON: The Canadian dollar, how will impact anything from corporate profits in Canada to exports?
>> BRIAN BELSKI: Doug did a great job of talking about how the Bank of Canada always leads in perms of pause -- terms of pausing rates, cutting rates, they were true to form this time around as everybody knows and cut rates pretty aggressively especially relative to the to the U.S. As was talked about from both Ian and Doug, if there was risk of the Fed. fund's futures and some of the forecasts being too aggressive next year, in that the fud is not going to be as aggressive. Bank of Canada is still trying to kick start things. The risks of further Canadian dollar weakness is likely. However, we do think that there's a light at the end of the tunnel. We do believe that as going back to my theme of normalcy, kind of get into a tighter range of monetary policy, a tighter range of ten-year treasuries in the United States. I think that will benefit the Canadian dollar. Also, too, remember that the Canadian economy, as Doug has talked about and been great with respect to his forecasts is going to have a little bit more jet fuel too over the next couple years with respect to the cheaper money, quote unquote. So we could see some gains there that people aren't ready for, and that could help boo' the Canadian dollar () for the longer term.
>> CAMILLA SUTTON: There are couple questions following up on the comments for the dollar, but what it means for the manufacturing sector in Canada?
>> DOUG PORTER: General rule to go by, first there's winners and losers from a strong and weak Canadian dollar. When we look at weak currency, shorthand is producers benefit and consumers lose. Not all producers, but it is a positive. I think on net a small positive for the manufacturing sector. The reality is a lot of firms are of course very well hedged, and so it won't have an outsized impact on manufacturing. But I think it at least helps them keep in the game on the competitiveness. Especially in a world of increased tariffs. We are going to need a weaker Canadian dollar to basically deal with increased U.S. tariffs if that turns out to be the world we're in at year two from now.
>> CAMILLA SUTTON: Brian, I'm not sure if this is election connected. However, a few questions here about GIC's, if one is leaving GICs, where should they be looking?
>> BRIAN BELSKI: Stocks. I think one thing people are missing today is there's still people that own a lot of bonds. This is not about growth being better. I think the people that we've talked to investing is people are selling bonds today. It's kind of interesting when you sell a bond the yield goes up and the price goes down, and I think people forgot that math, quite frankly, over the last 40 years the majority of total return from fixed income came from price performance not yield going forward. We are not the bond people but the equity people. We look at total returned portfolios I think, the total of return from bonds will come from yield. But we do believe that a lot of people Camila, have missed this equity move. Based on our conversations again, I'll say it again. In high net worth they didn't want to buy election, especially in Canada, until they knew who the winner was going to be. Institutionally a lot of investors, the majority of our investors are underperformed because they were not looking forward, and they were so afraid to be wrong they didn't want to be right. I know they've been holding large cash positions. So I think a lot of the recent selloff has been selling bonds and reallocating the equity. So I don't mean to be flippant but on the GIC side of things it matters. Talk to your relationship manager, talk about your taxable benefits, your long-term vision and where you are in life cycle of investing. But in equal weighted portfolio, in looking out 15 years I think it's time to get back into equities.
>> CAMILLA SUTTON: Thanks, Brian. Ian, any risks that we see some of the major economies like China no longer investing in U.S. treasuries?
>> IAN LYNGEN: That's an interesting question, because if we look at Chinese holdings of marketable treasury securities over the course ever the last 14 years, what we see is that in the early 2010 to 2014 period, the percentage of the government debt that the Chinese government owns was roughly peaked at 14 percent. It's now trending at less than 3 percent. So this idea that China remains a huge holder of treasuries is somewhat of a legacy of what was occurring from that 2010-2015 period. To a large extent we know what happens in China steps back from buying treasuries, and that is the treasury department finds the next buyer of last resort. That's to a large extent what we saw in 2023, back up in rates, more sophisticated domestic investment and hedge funds got involved. Demanded higher trend premium and steeper curve, not dramatically so. I think the fact that the Chinese economy continues to struggle and doesn't have the same amount of dollars to reinvest in their reserves has been compounded by the fact that they're diversifying. Buying gold, European government ponds. So I suspect as it relates to treasuries in particular it's going to be less of an impact than we might have as a market assumed there was going to be. The other big buyers we expect to step up, one Japanese investors who continue to add treasuries, and the other being domestic retail and domestic banks, which continue to be main stay buyers of U.S. treasuries.
>> CAMILLA SUTTON: Any risk of U.S. or Canadian recession on the horizon?
>> DOUG PORTER: That's interesting, I posed that question to audiences wherever I go, whether they think the economy is headed for recession over the next 12 months or not. It's fascinating how that answer has changed. When it was 2022, didn't matter the audience, didn't matter the demographic or region it was about 50-50. Now it's about maybe 10 percent. Who think there's going to be a recession in the next year. I would never put it that low. Historically going into any year regardless of what the back drop is the orders of recession in a given year are 15-20 percent as a starting point. Then you sometimes get higher or lower depending which way policy is leaning. I would say the risks are still a little higher than normal, just given the lingering tail we've had from inflation and the still-high interest rates that Ian referenced earlier. I would put the odds at a little heighter than normal. We cannot dismiss the risk. Especially when you load on the geopolitical risks. I'm asked what keeps me awake at night, it's the geopolitical risks. In a word, no, I would not dismiss the recession, although I believe it's 50/50 over the next year, and those risks are lower than they would have been a year or two ago.
>> CAMILLA SUTTON: You aren't alone what keeps you awake at night. We've covered a lot of ground exploring what this presidency means for the economic outlook, investment strategy and rates. We are going to continue to monitor things as we go forward. Doug, Brian, Ian, thank you all very, very much for your insightful words today. As usually you've add a tremendous amount of value. Thank you all for watching and listening. There will be a podcast and recap article for this event on your website commercial.BMO.com as well as BMO cm.com. If you have any specific questions feel free to reach out to your relationship manager. Thank you all very, very much for joining us today.
Camilla Sutton, CFA
Director of Canadian and UK Research, BMO Capital Markets
View Full Profile
The 2024 U.S. presidential election was a close race – until it wasn’t. Donald Trump leaned on a variety of themes that resonated with voters, particularly around the economy, and is now projected to secure a second term in the White House. Republicans also won control of at least one chamber of Congress.
Stock markets surged following the definitive election outcome, but investors are still assessing how Washington’s new political landscape will impact the economy and markets. To shed light on that question, BMO hosted The Election Effect: What’s Next for the Economy, Markets, and Interest Rates, a panel discussion featuring:
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Camilla Sutton, Managing Director, Head of Equity Research, Canada & UK (moderator)
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Doug Porter, Managing Director and Chief Economist
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Brian Belski, Chief Investment Strategist
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Ian Lyngen, Managing Director and Head of U.S. Rates Strategy
Markets Plus is live on all major channels including Apple, and Spotify.
Start listening to our library of award-winning podcasts.
Here are some of the key takeaways.
Strong market reaction
The strong initial market reaction to President-Elect Trump’s win provides some clues to what markets anticipate for the next year, explained Doug Porter. “Fundamentally, we’re looking at some upside risk to growth and inflation, a little bit of a stronger U.S. dollar, perhaps a wee bit less Fed easing than would have otherwise been the case,” he said.
Porter explained that another reason for the immediate positive market reaction is the view that the 2017 tax reform will be extended and the new administration will likely adopt a lighter regulatory touch. That would benefit the financial sector in particular, he added.
When Trump takes office in January, he will inherit a fundamentally strong economy with GDP growth hovering around 3% for the past year, which is ahead of the long-term average and above the consensus estimate. Meanwhile, inflation is close to the Federal Reserve’s target range, while the unemployment rate is at a healthy 4.1%.
The one “sour” reaction to the election results has been in the bond market, where yields have risen, said Porter, adding the $1.8 trillion budget deficit could also weigh on bond markets.
Tariffs and taxes
Taxes and tariffs were key parts of Trump’s successful campaign. Still, there was consensus on the panel that the rhetoric from the campaign could be very different from the reality of policy that emerges over the next few years. Porter expects the next Trump administration to adopt a lighter touch on the taxation front while putting the focus on tariffs.
Although a 10% tariff on all imports would be significant, a number Trump proposed on the campaign trail, Porter and Ian Lyngen shared the view that the tariffs may not trigger runaway inflation. He said it would depend on how nations reacted, adding that a stronger U.S. dollar could offset some of the inflationary effects.
“Tariffs aren’t necessarily reflationary,” said Lyngen. “In fact, they could be a bigger drag on global growth.” In his view, Trump’s immigration policy could have broader implications for the U.S. economy as employers struggle to fill vacancies.
Although Trump has often mentioned tariffs being a feature of his trade policy, Porter expects his focus to be mainly on China. “I do not take the threats of heavy increases of tariffs on China lightly at all,” he said. “I don’t know about a 60% tariff, but I would not at all be surprised if we are looking at a significant increase in tariffs on China in the years ahead.”
The Fed and Bank of Canada
Lyngen expects the Fed to cut rates again in December and then move to a quarterly cadence of 25 basis point cuts in 2025.
Still, there are two ways the election outcome could result in either a slower return to normal or a lengthier pause by the Fed, explained Lyngen. One way is to introduce significant tariffs and fiscal reforms, although Lyngen feels that path is unlikely. The other way would be if the equity market continues to rally further from here, which could be unwelcome from the perspective of monetary policymakers as it could constrain their options and create asset bubbles, he explained.
Although the Bank of Canada (BoC) has said it is not concerned with a policy gap with the Fed or the near-term effects on the dollar, Brian Belski noted that could change if upside risks for U.S. growth and inflation cause the Fed to be more cautious in terms of their rate-cutting cycle.
While Porter agrees with Belski’s assessment, he said BMO maintains the view that the BoC is on track to make a series of 25-basis-point cuts, ultimately taking the overnight rate down to 2.5% by mid-2025. “Fundamentally, that’s one of the reasons why the Canadian dollar has come under pressure.”
Market impact
Despite the market’s reaction to the election, Porter and Belski downplayed the impact that politicians have on the economy. “At the end of the day, politicians do not drive the economy,” said Porter. “Fundamentally, there are 160 million Americans getting up every day and going to work and a little over 20 million Canadians – that’s what ultimately drives the economy. It’s not the political backdrop.”
The reason markets have been so strong has everything to do with fundamentals, said Belski. “In my 35-year career, I’ve never seen certain areas of the market look so sound in terms of being able to understand how earnings look, balance sheet strength, debt-to-equity levels, operating income and things like return on equity, return on assets.”
Against that backdrop, Belski said his team remains very bullish on the U.S. and, by extension, Canada. “As America goes, so goes Canada,” he explained. Currently, Belski said that both the S&P 500 and the S&P/TSX are on pace to hit their targets of 6,100 and 25,000, respectively.
“Canada is a true stock pickers market,” he said. “If you take out the biggest 60 companies in Canada, Canada is really a small mid-cap index.”
More broadly, with interest rates coming down and growth moderating, Belski is hopeful investors will experience fewer days of the wild, volatile swings in markets.
For those anxious about what the election means for their portfolio, Belski said you have to focus on the facts, not what pundits say on the news. “Don’t ever invest in noise or emotion; invest in the facts,” he said.
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