The post-election rally fizzled this week.  Major US stock indices are lower as markets refocus on inflation and interest rates.

Prices were up in October in line with expectations, pushing the annual inflation rate up to 2.6% from 2.4% in September.  Core inflation (minus food and energy) rose to 3.3% as expected.

Markets are also considering the potential impacts of certain policies promoted by President Trump during his campaign, namely tariffs.  While a potential benefit of tariffs could include making US companies more competitive domestically in certain industries, the downside would be higher prices paid by American consumers, translating to higher inflation next year.  And higher inflation almost certainly means higher interest rates.

Tariffs were a meaningful part of how our government raised revenue prior to the establishment if the income tax.

Currently, tariffs make up just 2% of federal revenues.

Other policies, including eliminating taxes on tips, overtime, and Social Security, could also be inflationary (at least temporarily) as many consumers would suddenly have additional income to spend.  But the larger problem with these policies would be the reduction in federal tax revenue if they aren’t offset by massive spending cuts or additional taxes elsewhere.

Markets have been celebrating the potential for less government regulation and increased government efficiency under the coming Trump administration, but uncertainty surrounding inflation in 2025 is creeping into the markets and beginning to dampen enthusiasm.

 

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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