Republicans Strike Back: Return of the Jedi or a Phantom Macro Menace?

• Hope abounds that political adversaries can work together in the new Congress

• Macro conditions are at a crossroads both on Capitol Hill and Main Street

• Taking an optimistic view, we highlight what could go right in the years ahead, but assert that investors must adopt a macro approach to managing their money

There’s a new hope for the nation’s fiscal situation following the red wave of this past November. The Republicans, as of January 20th, control both chambers of Congress along with President Trump’s return to the White House. Speaker Mike Johnson earned a vote of confidence at the start of the year when he was re-elected to lead the House, but Republicans hold the narrowest advantage in nearly 100 years. What’s more, history has shown that the GOP has not always lived up to its fiscally conservative moniker.

A Slim Margin

Source: Barron’s

Policymakers’ work is cut out for them. The national debt has soared above $36 trillion and is poised to eclipse $40 trillion during the 119th Congress unless sweeping spending cuts are enacted and economic growth continues. A great economic force awakens, though, as the Republican agenda may hit the ground running as Trump steps into the Oval Office for the first time in four years. 

US Federal Debt: $36 Trillion

Source: US Debt Clock

US Debt Burden High and Rising

Source: Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

The 2024 Republican victory means a focus on extending and tweaking the 2017 Tax Cuts and Jobs Act (TCJA) which propelled the economy in advance of the COVID-19 pandemic. Tax revenue soared as Americans scored increased inflation-adjusted wage gains and new businesses were formed. This time around, however, the return of the Republicans will likely mean simply making permanent some of the TCJA’s provisions rather than vast tax-policy changes. Also, a return of the state and local tax deduction (SALT) will probably be included in the package. 

The GOP may also seek to partner with Democrats in further simplifying the tax code, but conservatives will have to pull some negotiation strings to get the corporate tax rate reduced further to 15%. 

As this new political era unfolds, it’s key to realize that the Republican Party of 2025 bears little resemblance to its recent past. Gone are the days of the GOP being the party of Mitt Romney, Paul Ryan, George W. Bush, or Dick Cheney; it has even ventured from many Reagan-esque policies. Today’s Republican Party is more populist, embracing tariffs, union members, and closed borders – three factors that are pivotal for a growing middle class. 

While that might make the old Gipper cringe a bit, these factors are critical to support a growing middle class akin to the US’s truly great period of the 1950s and ’60s. Tax cuts and deregulation are, of course, important to incentivize innovation and production, but it’s likely that there will be a strong emphasis on creating a system where everyone can benefit. 

On the regulation front, the GOP will seek common-sense regulation rather than wholesale changes. Lifelong Democrats like Robert F. Kennedy Jr. and Tulsi Gabbard may promote more involvement by the federal government versus further-right Republicans, so we’ll be watching what kind of regulatory changes are made and whether they will help restore America’s global manufacturing production stature. One hope is that RFK and Gabbard will link the left and right to form policy from which all Americans can benefit. 

Real Wages Increased Following the 2017 TCJA and Before the Pandemic

Source RSM

Indeed, working together will be key for the new Congress; the force will be with both parties if they can coordinate on policy. We can refer to Ray Dalio’s Archetypical Big Cycle for clues on what hangs in the balance and whether the return of the Republicans brings about a thriving empire or a galactic catastrophe. 

Inferring from Dalio’s Big Cycle, increased internal conflict would suggest that the US is on the downward path with a New Order set to take command on the global stage. But if both parties can cooperate in the years to come, then the nation can re-assert itself.

Government Success Relies on a Narrowing Political Partisan Gap

Source: Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

US: The World’s Leading Power, But At-Risk Big Cycle Scores

Source: Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

As it stands, the US faces a high risk of losing internal order. There’s an increasing wealth gap in our country with opportunities aplenty for households who have built significant wealth in the past several years. Crippling inflation from the pandemic left many working-class households frustrated and discouraged, and that was a primary factor in the red wave of 2024. 

Americans blamed Democrats for taking stimulus measures too far, pinning the consumer price rise on the party of the left; it’s apparent that workers are fed up with relying on the federal government to cut them checks. As we enter the second quarter of the 21st century in this country, the US’s financial position is unfavorable.

$6.75 Trillion of US Federal Spending in 2024

Source: Apollo Global

We as a nation are not relegated to a negative fiscal and cultural future, though. This new hope for a rekindling of American pride and vitality comes as we lead the world in tech and innovation – CEOs of the most valuable and popular companies seek to partner with President Trump over the next four years. Moreover, the greatest inventor and visionary of our time, Elon Musk, has teamed with the 47th POTUS to restore fiscal order within the Federal government. He and businessman Vivek Ramaswamy lead the Department of Government Efficiency (DOGE) which has the promise of cutting Big Brother’s fat. 

Think of those pragmatists as stormtroopers, but instead of working for the autocratic Galactic Empire, they are on the side of the American taxpayer. It remains to be seen how effective DOGE will be at taking lightsabers to porky spending and bringing the annual budget back in line. Musk and Ramaswamy are like do-good Jedis fighting Sith lords in DC who seek to keep the unsustainable status quo.

It’s important to maintain a historical context on how important global production is to US strength. The country once held a dominant position in manufacturing and industrial production, accounting for over 50% of the world’s output at its peak. Particularly during the middle of the 20th century, manufacturing supremacy contributed significantly to America’s wealth path and economic power. 

But the landscape has changed in recent decades as globalization has reshuffled the major players. The net impact has been negative for the US, with production shifting overseas – even to geopolitical adversaries in some instances. The loss of manufacturing jobs and the hollowing out of industrial centers have contributed to growing income inequality and the realization that national wealth is directly tied to production.

DOGE Seeks a Slimmed-Down Federal Government

Source: Fox News

The years ahead – even terms beyond the 119th Congress – will depend on Republicans and Democrats working together. Bipartisanship is key because it generally encourages a friendlier relationship between political adversaries, and that trickles down to Main Street. The 2024 election cycle was perhaps the most divisive in US history; a growing gap between the right and left has negative implications for society writ large. One issue on which both sides seem to agree is energy policy. 

Trump and the Republicans embrace a “drill, baby, drill” mindset with respect to domestic oil and gas production. Even under President Biden, lower-48 crude oil production ticked to new all-time highs. All else equal, that means greater energy independence and lower expenses for the American people. Predictable oil costs are a boon for small businesses, too, along with large US industrial firms and manufacturers. Lastly, low and stable energy prices would help cool inflation.

Record Lower-48 Crude Oil Production

Source: EIA

The stakes are higher than ever given the country’s vulnerable position in the global world order. External threats are significant as US internal conflict trends have worsened post-COVID. Along with new optimism that Republicans and Democrats can work hand-in-hand, if effective tax policies are inked into law, inflation falls to the Fed’s 2% target, business leaders guide the fiscal agenda, and energy independence endures, then the US’s Empire Score, as Dalio grades it, can stabilize and perhaps turn favorable. As Dalio’s ‘dynamics to pay attention to’ outlines, policymakers’ time frame of decision-making needs to term out and break free from the short-term focus of years past.

So, where should you invest if the Empire were to strike back, so to speak? Investors must be realistic about future returns in today’s environment. In early 2025, the S&P 500 trades at more than 21 times forward earnings estimates. Bond yields have risen closer to 5% amid worries about the federal government’s ability to meet its long-term financial obligations – we see that in a rising “term premium” for Treasury bonds. 

Term premium simply refers to the excess yield demanded by investors for owning longer-duration bonds as opposed to a series of shorter-term bills and notes. The higher Treasury rates venture, the more interest is owed on the climbing national debt. The return of the Republicans and bipartisan efforts can potentially thwart a debt spiral and a crisis of confidence.

St. Louis Fed 10-Year Treasury Term Premium Estimate: Highest Since 2011

Source: St. Louis Federal Reserve

If order is restored, then today’s TIPS yields above 2% are actually intriguing when scanning rates over the past two-plus decades. Furthermore, the bond market points to strength in corporate debt. High-grade and junk bonds feature very low interest rates, implying that company balance sheets are sound and cash flow is healthy. As precarious as financial matters are at the federal level, the private sector appears to be on a solid foundation. 

US Corporate Credit Spreads Historically Tight, a Positive Signal

Source: Apollo Global

More macro clues are seen in the currency market. The US Dollar Index (DXY) has been on the rise ever since Trump’s chances to win the 2024 election began to ascend. A strong US dollar sounds good in theory, but a more expensive domestic currency is a headwind for American manufacturers and industries that depend on significant exports. 

An experienced businessman himself, Trump surely understands that both high interest rates and a dollar that is too strong relative to other currencies will eventually pose problems for the economy. He may look to enact policies to cool off the greenback once tariff negotiations are largely completed. On the flip side, what we don’t want to see take place is the dollar losing its reserve currency status. Goldilocks would be a gradual easing off the gas pedal for the DXY.

US Dollar Index Spikes to Near 109 Post-Election

Source: TradingView

There are plenty of moving pieces and challenges for the latter half of the so-called Roaring 20s. It makes it all the more important for investors to take a macro method to investing. Even beyond your asset allocation, households and consumers will be impacted (negatively or positively) based on how effective Republicans are over the years on tap. 

How the two parties cooperate has key implications for how together or divisive US class relationships evolve or devolve. A positive outcome would support higher stock prices, calm volatility, and a ‘buy the dip’ mentality. Unstable, ineffective domestic and foreign policies also underscore that investors must pay close attention to the macro; by monitoring macro trends and spotting clues, you can better manage risk and preserve capital.

Return of the Jedi: Long-Term Upsides

Fiscal sustainability is achievable with a permanent and simplified tax code and DOGE overseeing federal spending. Lower annual deficits and healthy real economic growth could even bring down the national debt if all the stars align. Tariffs, while they are like playing with economic fire, could reassert the US’s might among other global powers. On the regulatory policy front, red-tape rollbacks and streamlined financial and energy policies could create opportunities across key cyclical sectors, all while growth areas like tech keep chugging. Restraint at the Federal Reserve would also foster long-term US economic upside growth potential.

The Phantom Menace: Potential Risks

It’s unclear right now as to whether all of these proposals and macro constructs will lead to a mild recession or economic overheating in a negative outcome. Deregulation, tax cuts, and enthusiastic businesses and consumers might result in above-trend growth that could bring about a recession in a boom-bust scenario. Income inequality could still grow, too, if tax changes favor those who already control significant wealth. Maybe the biggest downside is the risk of heightened tensions among world powers if a protracted trade war breaks out. Finally, we pointed out at the onset that the Republican House majority is very narrow; even minor GOP infighting would put free-market progress in jeopardy.

A New Hope: How You Should Position Your Portfolio

Investors have been rewarded by staying long the US, namely megacap tech stocks over the past 15 years. It may be prudent to consider rebalancing to areas like value, SMID caps, and even non-US stocks. Don’t go overboard expecting a cycle shift just because of a change in the White House and on Capitol Hill, however. Shares of banks may keep outperforming in the years ahead, with perhaps some improved price action among smaller banks if domestic growth is firm with stable interest rates. Less regulation could help the Financials sector along with some oil & gas stocks. Elsewhere, precious metals and bitcoin can be effective portfolio stabilizers if macro conditions go awry. No matter the scenario, Allio will provide our thoughts on the macro and favorable risk/reward opportunities as they come about, so stay tuned.

The Bottom Line

“Do or do not, there is no try.” That may be the Republicans’ mantra going forward. Investors should adopt a similar mindset. The macro situation will be in flux, but we are optimistic that both sides of the aisle will work together, at least enough so to foster an economic environment that’s conducive to growth and confidence. Executives in C-suites and parents at the dinner table have good reason to feel upbeat about the years ahead, but the macro path is not all clear. May the force be with us all.