Within a few days from now, Donald Trump is set to be inaugurated as the 47th president of the US. His return to the White House is, as we have noted in previous newsletters, cause for both trepidation and anticipation for equity markets, given his promises to slay many of the sacred cows in modern economics.
Trumpian economic policy can be broadly divided into two categories. On the one hand, Trump is a true believer in the economic benefits of deregulation and tax cuts, particularly for corporations and the wealthy. These policies are pro-growth and could be expected to lift corporate earnings and stock market valuations in the shorter term. This is the reason that we saw a strong US equity rally post Trump’s victory in early November.
On the other hand, Trump has swept into power on the back of America-first policies. He has, among other things, vowed to curtail both legal and illegal immigration as well as to impose 60% tariffs on the importation of goods from China and 20% on the rest of the world to reignite American manufacturing, as well as pay for his proposed corporate tax cuts. If the Trump administration fully delivers on these policies, most economists agree they would both dampen demand and fuel inflation – in other words, they would be stagflationary. Consumer prices would rise, especially for goods where the US is a net importer, and disposable income would take a knock. Perhaps most importantly, the Fed would be less inclined to cut rates and so equity and bond markets would not have as much of the tailwinds they are currently pricing in.
The potential upheaval would not be limited to the US. Trading partners such as China, Canada, Mexico, and the European Union would feel varying degrees of economic pain as a result of lower exports to the US and higher US interest rates. Like during Trump’s last term, affected foreign nations would most likely reply with carefully calibrated tariffs of their own, which would impact their own economies.
Bold promises, uncertain outcomes
Trump, who has vowed to hit the ground running and has already alarmed observers with some of his cabinet choices, is promising a bold agenda for his second term in office. The question is whether he will be willing and have the support to go as far as he promised in overturning well-established trade, fiscal, and foreign policy norms – and how quickly he can do this.
One important fact to bear in mind is that Trump broke 54% of his campaign promises in his first term and delivered only on 24% of his promises without compromises. Though he may be emboldened by the Republican majorities in the Senate and the House of Representatives, there is a track record of concession when necessary. In addition, the Republican party will look to remain in power beyond Trump’s final term and thus may be less inclined to support some of his more radical and politically unpopular policies.
Trump watered down his protectionist policies in his first term when they began to batter equity valuations. In addition to reality checks from equity and bond markets as well as the Fed, voices of reason in the administration like Treasury Secretary nominee Scott Bessent and some in Congress, may prevent the implementation of extreme and potentially damaging policies.
Another crucial point is that government machinery grinds slowly, as much as Trump and backers like Elon Musk would love to move fast and disrupt the status quo. This could cause some dislocation between the implementation of protectionist policies and tax cuts – one risk is that inflation surges before pro-growth deregulation and tax breaks can be enacted as manufacturers ramp up their imported inventories before the implementation of tariffs.
Deficit risks
These factors suggest that, beneath the noise and chaos associated with Trump, changes to the architecture of the economy and government will be slower and less radical than feared. It seems likely that the extreme tariff threats will be an opening bid and that any new tariffs will be targeted and phased in – rather than implemented everywhere at once.
Also, American companies’ stockpiling inventory ahead of potential tariffs, means that they can defer price increases to the end customer. Likewise, any mass deportation of illegal immigrants is a massive logistic exercise that will take years to fully implement, even if Trump makes it a priority.
Furthermore, many of Trump’s plans are premised on the idea that he will be able to reduce federal government expenditure by $2 trillion. Given that the bulk of federal spending goes to defence, social security, and Medicare, Trump will not be able to reduce spending without political blowback.
Perhaps more concerning is the impact of Trump’s plans on the deficit and federal borrowing. The deficit for 2024 is forecast to reach 7% of GDP and public debt is expected to rise close to 100% of GDP. This could impact borrowing costs for governments elsewhere in the world as well as stoke US inflation in the longer term. Indeed, there are many Republicans who are concerned about the size of the deficits and cumulative debt, and this may be a roadblock to his efforts.
Taking all the above factors into consideration, we believe that the Trump agenda may not have an immediate impact on the overall direction of markets but will certainly add daily noise. Given the resilience of corporate earnings, slightly lower interest rates, and the underlying strength of the US economy, we enter 2025 under conditions that should underpin global equities over the medium term.