Editor’s Note: For the next several days, we’ll be sharing special editions of Wide Moat Daily. We’ll be sitting down with Editor Brad Thomas to get his thoughts on the year that just was and ask him his predictions for 2025. Today, we discuss the implications of a second Donald Trump presidency, and what it could mean for markets. Read on…
Van Bryan (VB): Brad, you were a former advisor to the Trump campaign during his 2016 run. You’ve also stayed in contact with the president-elect ever since. So, I’d like to ask you your views on what a second Trump administration could mean.
Brad Thomas (BT): Sure, I’d be happy to.
VB: Donald Trump will assume office on January 20. That’s only a few weeks away. At a high level, what are your opinions for a second Trump administration?
BT: Well, what’s interesting to me is what he’s doing differently. During his first term, you’ll remember that his cabinet filled out very slowly. It took him some time to get his feet under him. That’s understandable. After all, he’d never done the job before. In fact, he admitted as much to Joe Rogan during the campaign. During the first time around, he didn’t fully appreciate how many appointments there’d be.
But it’s interesting to see how fast he’s making appointments this time. Within really just a month of election day, the cabinet was pretty much filled. Most of the major appointments had been made. And I really like a lot of the people he’s putting in.
We don’t have to go through all of them. But from an investor’s perspective, some of the big ones would be names like Scott Bessent at Treasury, Howard Lutnick as Secretary of Commerce, and Chris Wright for Secretary of Energy. Bessent was a former hedge fund manager. Lutnick is the head of Cantor Fitzgerald. And Wright is an oil and gas executive. These are heavy hitters with a lot of experience from the private sector, which I love to see.
They say personnel is policy. And in this case, the personnel choices suggest the priorities will be economic growth and jobs. Which makes perfect sense. Economic issues were one of the top priorities for voters. If I had to guess, I’d say one the things Donald Trump wants to be remembered for is job creation. That’s one of the big things he helped accomplish during his first administration, prior to Covid at least. And he’s going to do everything he can to make it happen again.
VB: You haven’t been asked to serve in any capacity, have you?
BT: You know, a lot of people ask me that. After all, I was an advisor the last time around. I’d of course be honored to be considered, but I don’t have any interest. I’m very happy where I am at Wide Moat Research, helping our subscribers grow their wealth.
Although, I will tell you I’m working on attending the inauguration. And if I can do it, I’ll be sure to write to readers about the experience.
VB: What challenges do you see for the new Trump agenda?
BT: Interest rates are still a wild card. The Federal Reserve has signaled that the Fed Funds rate should fall in the months and years ahead. All else equal, that should help bring rates down across the economy. We’re speaking a little before the FOMC, but the market is pricing in another quarter-point cut to end the year. But from there, we’ll have to wait and see. The Fed has also hinted that it’s not in a huge hurry to cut rates.
Another wild card would be a recession. I’ve been on record that we may see a garden variety recession sometime in the next 12 months or so. And if that happens, it would, by definition, be an obstacle for economic growth. But for investors, it also wouldn’t be the worst thing in the world.
A small-scale recession would likely bring down the premiums on many of our favorite stocks, allowing us to buy them at a discount. Some of the best-performing holdings in The Wide Moat Letter were bought during the brief Covid recession.
[As of this publishing, the top three holdings in The Wide Moat Letter are Qualcomm (QCOM), Lowe’s (LOW), and Broadcom (AVGO). Those holdings are up 158%, 257%, and 1,101%, respectively. All three were recommended during March of 2020.]
VB: What specific policy goals do you think the Trump administration will aim for?
BT: Well, the obvious one is tax cuts. One of the first big things Trump did during his first term was sign the Tax Cuts and Jobs act in December of 2017. It did lower individual income taxes. But arguably more important was what it did to the corporate tax rate. It changed the corporate tax rate from a tiered system as high as 38% to a flat 21%.
That’s obviously an incentive for new business creation. But for investors, it was also great news. That’s because a lot of American companies – all of a sudden – had more money on their hands that they would have otherwise had to pay to Uncle Sam. Some of them spent it on new initiatives in their business. But a lot of that money was paid out to investors.
S&P Global had some interesting data on this front. The firm tells us that share buybacks for S&P 500 companies was about $590 billion in 2017. But in 2018, the first year the tax cuts went into place, that figure was $875 billion. So, that’s more than a quarter-trillion extra paid out to investors. That’s one of the reasons markets were so buoyant that year. And if you’re an investor, it had to have been welcome news.
Now, the changes to individual tax cuts were set to expire in 2025. The changes for business were set to expire in 2028. But I promise you, both are going to be extended now.
Trump has even proposed lowering the corporate tax rate a bit further. And he’ll have the support to get it done. If he does, I expect more buybacks, more special dividends.
That is, in my opinion, one of the reasons markets have been so jubilant since Trump was elected back in November.
VB: A lot of his critics would say that cutting taxes will make the federal debt worse. What’s your response to that?
BT: Right now, federal debt is something like 120% of GDP. You’re right, something has to be done. Trump’s mindset is to grow the economy out of that hole.
For the past 10 years or so, GDP growth has been in the neighborhood of 2% to 2.5%. But if you’re able to get that figure up to 3%, 3.5%, or 4%, that makes a world of difference over time thanks to the magic of compounding. If you’re an investor, you know exactly what I mean.
Sustain that long enough, and you become underleveraged. In other words, the economy has grown so much that the debt becomes very manageable.
That’s what Donald Trump has historically done with his business enterprises. I think it’s a similar mindset for government. And that’s why efficiency and cutting down on government waste has been another big priority for the incoming Trump administration.
VB: What about tariffs? A lot of people are worried about the effect those might have on imported goods.
BT: Well, it’s interesting that Trump is so synonymous with tariffs. He’s certainly very vocal about using them. But actually, Joe Biden maintained many of the tariffs from the first Trump administration. He even increased several of them for certain industries.
My general view on tariffs is that they can and should be used surgically. For instance, the Chinese electric vehicle industry is heavily subsidized. And my strong suspicion is that this is done to undercut and harm a lot of American automakers.
I’m sorry, but that’s not the free market working. That’s a form of economic warfare. And no self-respecting country would put up with that. The first Trump administration understood that. And the Biden administration, though less vocal, understood that as well.
But at a broader level, what so few understand about Trump is that he is – first and foremost – a dealmaker. He is very transactional.
I don’t know why this isn’t obvious. He literally wrote the book The Art of the Deal. And when I was writing my book, The Trump Factor – which looked closely at the Trump real estate empire – I learned about his strategies firsthand.
And one of the first rules of dealmaking is that you always negotiate from a position of strength. And your first salvo in negotiations is always asking more than you’re willing to settle for. If you’ve ever negotiated on buying a new car, you know what I mean. But in the end, you find a way to a happy middle.
When it comes to trade relations, Donald Trump has a carrot and a stick. He wants the counterparty to take the carrot. But that stick only means something if you demonstrate that you’re willing to use it.
That’s just a way to say that – in my opinion – many tariffs are not a long-term proposition for this administration. They’re a negotiating tactic. And once a deal is reached that’s mutually beneficial, they will be adjusted. The exception might be instances where you have unfair practices like we just talked about or areas of industry that are important for national security. Advanced technologies come to mind for that.
If I had to put a bottom line on the topic of a second Trump administration, I’d say I’m optimistic. The administration is clearly focused on growth. Trump’s personnel reflect that. His policies reflect that. And if you’re an investor specifically, I see plenty of reasons to be hopeful for the next four years, whether you voted for the man or not.
VB: Thanks, Brad.
BT: Anytime.
Editor’s Note: Tune in tomorrow when we’ll discuss real estate and Brad’s specialty, real estate investment trusts (“REITs”). As you’ll learn tomorrow, REITs have had a difficult run, but there are plenty of reasons for investors to put this asset class on their watchlist right now.
MAILBAG
What do you think Trump’s second term will mean for the markets? Write us at feedback@widemoatresearch.com.