Uncertainty In Washington Will Linger: Schwab Strategists At IMPACT Conference

Charles Paikert

20 November 2024

The swirling post-election developments in Washington surrounding tax policy, tariffs, debt, inflation and immigration add up to “a lot of uncertainty that isn’t going to dissipate anytime soon,” according to Liz Ann Sonders, Charles Schwab’s chief investment strategist, speaking at the opening of the firm’s annual IMPACT conference in San Francisco.

A potential rise in inflation will be the biggest wild card if President-elect Trump’s campaign promises actually take effect, Schwab’s political and investment strategists said at a keynote panel.

The impact of tariffs and rising labor costs if mass deportations are carried out could result in a “huge surge in inflation at the extreme end of the proposals,” Sonders said. The cost of replacing workers who are deported, which could total an estimated 8 per cent of workers, will “clearly put a strain on a lot of employers,” said Kathy Jones, Schwab’s chief fixed income strategist.

Battles ahead in Congress
The budget and the debt ceiling will be major battles in the next Congress, where Republicans will hold only a slim majority, said Michael Townsend, Schwab’s political analyst in Washington.

Extending the current tax law and adding additional tax cuts proposed by Trump during the campaign will “cost a lot” – significantly increasing the deficit, according to Townsend. Investors shouldn’t expect the new Department of Government Efficiency headed by Elon Musk to help solve the problem, he added.

“There isn’t $2 trillion in the budget to cut,” Townsend said. “And Musk has no power. He can only make recommendations. Only Congress has control over the budget.”

There will also be a fierce fight in Congress when it comes time to vote on raising the debt ceiling, Townsend said. Conservative Republican representatives who have never voted to raise the ceiling may be forced to do so to avoid plunging the country into default, he predicted.

Trump’s proposed tariffs will also run into skepticism in Congress, said Jeffrey Kleintop, Schwab’s chief global investment strategist. If the average tariff is projected to leap to 26 per cent from the current 2.6 per cent, that is likely to be “the starting point for negotiations” rather than a done deal, Kleintop said.

Bond market watching term premium
As for fixed income, the bond market is grappling with term premium, the compensation that investors require for bearing the risk that interest rates may change over the life of the bond, which has flipped from negative to positive, Jones said. Investors are demanding extra yield considering all the uncertainly in Washington stemming from proposed tax cuts, tariffs and deportations.

As a result, the Federal Reserve Board can’t make the same assumptions about the economy when deciding whether to continue cutting interest rate cuts as they could before the election. The uncertainty has also caused Schwab to advise investors not to have too much duration when they buy bonds or Treasury bills, Jones said.

While ambiguity in Washington won’t be resolved anytime soon, Townsend said, deregulation is one policy change that is sure to happen.

Jon Beatty , head of advisor services for Charles Schwab, opened the conference focusing on the future of the RIA industry, which he predicted would reach $20 trillion by 2034. Beatty was followed by outgoing Schwab CEO Walt Bettinger, who praised his successor, Rick Wurster, and gave an emotional farewell after serving 16 years in the top job.