Markets poised for continued robust returns

By Susan Rupe

One of the most difficult things for investors to do is discern between signal and noise. And the 2024 presidential election was more noise than signal.

That was the word from Dave Sekera, Morningstar’s chief U.S. market strategist during a recent Morningstar webinar on how the presidential election is affecting the markets.

Sekera views the markets with continued optimism. The U.S. equity market “is priced to perfection,” he said.

Strong economic growth, moderating inflation, declining interest rates and easing monetary policy is leading to robust returns. “The only headwind to the market right now is that slowing rate of economic growth that we're expecting. At this point, I think there are still enough tailwinds behind us as opposed to those are overwhelming the headwind.”

Will the Nov. 5 election for president and Congress drive developments in the macroeconomy? Preston Caldwell, Morningstar’s chief U.S. economist, said there’s no guarantee that large scale policy changes can be pushed through Congress, especially with Republicans holding a narrow lead in the House of Representatives.

But trade policy is one exception, he said, because it’s one area in which the president has authority to enact sweeping changes without legislative approval. And one area of trade policy that President-elect Donald Trump campaigned on was hiking tariffs on goods imported from a number of nations including China.

Tariffs 'bad for the economy'

“Economists are pretty much unanimous that high tariff rates are bad for the economy,” Caldwell said.

Morningstar predicts that Trump’s proposed tariff hikes could cause the U.S. gross domestic product to fall by 1.9%. A 10% uniform hike in tariffs would create a 1.4% drop in GDP while a 60% tariff on products imported from China would result in a 0.5% fall in GDP. Combined, the tariffs would have a 1.9% decrease in GDP.

The analysis further went on to assume a 32% probability that Trump would impose a 60% tariff on China while assuming a 7.5% probability of a 10% uniform hike in tariffs.

Caldwell predicted manufacturers will respond to higher tariffs on China by rerouting goods through other nations such as Vietnam.

Whether higher tariffs also impact inflation and interest rates depends on how the Federal Reserve responds to the tariff hikes, Caldwell said. “My assumption right now is that the Fed would be fairly proactive so that if this scenario were to play out, it would cause higher interest rates. But at the same time, that would keep inflation from being upwardly impacted by these higher tariff rates.”

Morningstar projects the combined U.S. government deficit as a share of GDP to average 8.2% over 2025-26 and then drop to 7.4% over 2027-28 as interest rates fall. That’s moderately above the prepandemic average of 6.4%. Morningstar also expects partial renewal of the TCJ with some offsets, adding about 1% of GDP to the deficit.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].