Given the significant political turmoil we've witnessed recently, it is reasonable for traders to question how the markets and economy will perform in 2025 as a new administration takes power next January.

 

If only a comprehensive guide existed to navigate such uncertainty. The stark differences in party platforms seem firmly established.

 

Such a guide might be called, "What to Expect When You're Electing," providing a wealth of insights for next year's economy.

 

The guide would compare policy platforms and outline the respective economic implications of each. It would also examine likely market behaviors in the initial year of a new presidential tenure as well as tax and regulatory frameworks. This resource would depict the risk/reward scenarios for the macro economy and individual sectors.

 

Of course, things do not always proceed as planned.

Undoubtedly, external factors such as the composition of the new Congress and unforeseen events outside the control of U.S. domestic leadership also play significant roles.

If such a guide were available, it might look something like this.

 

The GOP, under presidential candidate Donald Trump, might aim to extend the 2017 Tax Cuts and Jobs Act. They could potentially reduce corporate taxes further to 15% from the current 21% and impose tariffs on imports.

Additionally, a second Trump term might seek to roll back various Biden-era regulations, including incentives for clean energy.

 

In theory, one could argue that tax reductions and deregulation benefit business. They would be a positive development for Wall Street and, by extension, financial markets.

However, more unfunded tax cuts would exacerbate the nation's deficits and debt. The U.S. debt to gross domestic product ratio was 123% as of the 2023 fiscal year.

 

Across-the-board tariffs are fundamentally inflationary, according to economists. They could also trigger a global trade war and subsequent recession.

Former President Donald Trump is also pledging the largest mass deportation of immigrants since the Eisenhower era, at a time when the U.S. has more job openings than available workers, according to the latest Bureau of Labor Statistics data.

 

A significant reduction in the labor force is both inflationary and recessionary. This scenario could result in stagflation.

Observers await tax policy details from Vice President Kamala Harris, whom President Joe Biden endorsed to run in his stead. The administration has suggested rolling back the Trump tax cuts, returning the highest marginal income tax rate to 39.6%, its level before the 2017 Tax Cuts and Jobs Act. They also propose raising the corporate tax rate to 28%.

 

Wall Street is unlikely to favor such changes.

Expectations include a continuation of strict regulatory practices, which corporate America has found restrictive during the Biden administration.

Furthermore, Biden's proposal includes raising the top marginal rate on long-term capital gains and qualified dividends to 44.6% from the current 20%, in addition to a 3.8% net investment income tax for high earners. He also aims for billionaires to pay at least 25% of their income in taxes.

 

One could argue that increasing taxes as the economy softens may lead to a recession, even if the Federal Reserve's interest rate policies were becoming more lenient.

Historically, the first year of a presidential cycle is the toughest for the stock market, prompting our guide to recommend locking in profits sooner rather than later. This strategy is advisable regardless of the election outcome and acts as a hedge against unexpected events and policy shifts.

 

The past two years have brought significant gains for stock market investors, despite uncertainties following the pandemic-related lockdowns.

However, now is the time to prepare for the near future by setting aside some emergency funds in case the next administration's policies result in higher expenses than anticipated.

 

Indeed, 2025 might come to be known as "the year of living anxiously," a theme that could be explored further in a sequel to our guide, "What to Expect in the First Year."

— CNBC Contributor Ron Insana is the CEO of iFi.AI, an artificial intelligence fintech company.