Neither candidate for president discussed the dire deficits facing the United States, nor did either talk about a reduction in spending. As Dr. Elliot F. Eisenberg, Ph.D., sagely points out, “Portions of Trump’s 2017 tax cut have already sunset, others will expire in 2025. Extending the unexpired sections will cost $5 trillion through 2034 but will have no impact on GDP or inflation as they will simply extend existing policies. However, lowering corporate taxes, exempting tips, Social Security, and overtime from taxation, and making car loan interest and S.A.L.T deductible will boost GDP but raise the deficit by $4 trillion.”
It's always interesting to see how the stock market responds to a major news event. And this week is no exception. President Donald Trump won the election, and, on Wednesday, the stock market shot up, grabbing headlines, while bond prices sank. If you only care about equities, fine… the performance seemed to unequivocally endorse the result. Or did it?
Historically, the stock market has shown no clear performance difference whether Republicans or Democrats are in control of the White House. A look at 10-year Treasury yields over the last several decades show the same disregard for who’s in office. In addition, "presidential election cycle theory" states that the first two years of a presidential term tend to coincide with weaker stock market performance, as the new administration focuses on fulfilling campaign promises.
Most corporations (and investors) see elections differently than citizens. While many of us base our votes on a variety of issues, corporations tend to be much more single-minded: They care mostly about regulations, and whether an administration will add and enforce them, or eliminate and relax them. Certainly, the prior Trump presidency fell into this category, and there is no reason whatsoever that those policies won’t continue between 2025 and 2029.
Of course, macroeconomic factors, including assumptions about future policy, drive the stock market; no one person, even a president, ever has complete control. Long-term investors in stocks or bonds have a distant time horizon. Believe it or not, market movements driven by the news, even big news like a presidential election, aren’t particularly significant over years or decades. Most investors can safely shrug off short-term volatility, whether the market goes up or down. What’s most important is staying true to your strategy and remembering that the stock market has generally gone up.
For those whose livelihood depends on, in part, interest rates, sometimes a long-term perspective doesn’t quite work. The MBA’s forecast of gently lower rates in 2025 won’t help bring business in now.
This week’s Lenders One call discussed the election results and potential impact on residential lenders. The show prompted one person to write to host Robbie Chrisman, “Once again, thank you for driving this discussion in a rational manner. The psychological operation that the media did to people that bought into Harris is overwhelming and overrides logic. In an industry where the number one costs are regulatory burden and our interest rates from the Fed (‘fix inflation’ my a$$) are huge concerns.
“Clearly, Trump wants to remove regulations and bring rates back to normal. This should be overwhelmingly celebrated by Mortgage Professionals. However, the psyop, or bias, that people have against Trump have people arguing that Harris would have been better for our industry. It’s madness and none of the data supports that at all, in fact proves the opposite. The proof is in the data. Less regulation and better interest rates will make our industry boom. Trump will bring that.”
Recently the Commentary noted, "If Donald Trump takes the White House, and the Republicans take both the Senate and the House, it is expected that the perceived pro-business, government bias would limit any fallout from higher nominal rates… Presumably, a Trump win would be bad for bonds as tariffs would raise prices, and a more pro-business regulatory regime would be better for the economy overall, which will keep the Fed from cutting rates as aggressively. A Trump Presidency would also bring back the debate over what to do with the GSEs."
Economists agreed that a win by Republican presidential nominee Donald Trump would lead to higher mortgage rates, as he is expected to impose tariffs on imported products, among other policies, which could drive up the cost of goods and contribute to inflation. Lenders know that the Federal Reserve, not the U.S. president, has the greatest control over the direction of mortgage rates, and that the Fed operates independently of political pressures (currently).
The Federal Reserve is expected to reduce its benchmark interest rate by 25 basis points this week given the slowing inflation rate. So, in theory, mortgage rates will likely be lower next year, not because of the president, but because inflation is pretty much under control now.
Indeed, there is no reason whatsoever to believe that the last Trump Administration’s move toward releasing F&F from conservancy would not continue this time around. That, however, will take 2-3 years, as it is much more complicated than simply pushing a switch. There are complicated policy, procedure, and legal issues that must be replaced or re-thought. Any holder of MBS issued since 2008 will wonder about who is going to stand behind the reps and warrants, for example. It is generally believed that F&F without government backing would increase mortgage rates 1-2 percent, bringing Agency rates closer to non-QM lender rates.
Neither candidate seemed too concerned about deficits, which is a problem. (In fact, has anyone in Congress brought up the topic in the last few decades?) No one in the industry wants any president to have direct influence over the Federal Reserve’s interest rate setting. And Harris’ proposal for first time home buyer credits is not a good policy: helping the demand of housing merely drives up prices and does nothing to motivate builders to build those homes. Yes, there are other proposals, but, like turning an aircraft carrier, they will all take time.
Aside from those things, in my travels there is a constant refrain that a Trump administration will lead to a less burdensome regulatory environment in general… banks, non-banks, DOJ, CFPB, and so on. It isn’t necessarily GSE reform that would ease regulations, but the overall tone of the Administration. As one person quipped, “Under Trump the CFPB will be neutered.”
Just two days after the U.S. presidential election, the Federal Reserve announced that it decided on a second rate cut this year. This comes after the Fed announced a 50-basis point cut to its benchmark interest rate in mid-September, the first cut in four years. These decisions are supported by inflation trending down to Fed target rates, despite the continued strong employment data and consumer spending.
Will the Fed’s rate cut help consumers in what is still a tough housing market? Probably not, as the Fed looks at prior data, but the bond market tends to be more forward thinking. Given how the 2-year through 10-year treasury yields shape mortgage rates, as does supply and demand, the cost of borrowing is likely to remain higher for longer. Of course, higher mortgage rates will also reduce the number of homes sold, as does the cost of insurance (which the Federal Government or presidential administrations have little or no control over).
Inflation reached 9.1% in June 2022, the highest 12-month increase in about 40 years, due to the COVID-19 pandemic. After a series of rate hikes, inflation fell to 2.1% in September, near the Fed’s target of 2%. Fed watchers know that the Federal Reserve is dependent on economic data, and the fiscal implications of President-elect Donald Trump’s policies have not yet made its way to the statistics yet. Should Trump implement fiscal policies as promised, it could ignite higher inflation by June 2025. And we know what the Fed does when that happens.