The high-risk, high-reward Trump market
MARKETS abhor uncertainty. That bit of Wall Street wisdom helps explain their ebb and flow since Donald Trump’s victory on Election Day, and even earlier.
Stocks and bond yields began rising early in October, when Wall Street concluded that Trump would win. The market surge accelerated after he did.
Yet for the markets, uncertainty has not vanished. It is merely coming from another direction. Because Trump’s approach to politics and economics is so disruptive and unconventional, markets have been straining to digest the implications of the power transfer in Washington, switching erratically between elation, confusion and occasional bouts of high anxiety.
Aspects of the Trump platform are balm for the markets. He promises lower corporate taxes and less regulation. Those assurances are being widely interpreted as a recipe for fat company profits and a prosperous stock market.
The president-elect is also expected to try to extend tax cuts that he signed into law in 2017 and that expire at the end of 2025. Over the short term, these measures are expected to stimulate economic growth.
But not all of his programme is positive for growth. Trump is a self-described “tariff man”, calling for sharply increased tariffs on China and lesser but substantial levies on all other trading nations.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Furthermore, he has promised a drastic reduction in immigration and a tsunami of deportations – a disaster for thousands of families and a move that, in cold financial terms, would reduce the supply of labour in the United States. Textbook economics tells us that adding tariffs and reducing the workforce could slow the economy and spur inflation.
Some companies might well benefit from these specific policies. Stocks of private prison firms such as Geo and CoreCivic, which can build and operate temporary detention centres, have risen with the president-elect’s fortunes, and shares of smaller domestic companies with little international revenue jumped after the election. Also rising, companies that provide services to dentists.
But the S&P 500 has given up ground and bond yields have jumped since the initial election buoyancy. Processing the disparate policy signals from the new administration and incorporating them into broader views about profits and interest rates is no simple matter. No wonder the markets are struggling to make sense of it all.
A widening deficit
The various Trump domestic programmes are likely to widen the already gaping federal budget deficit, which in itself could be inflationary and could be disruptive for the bond market. This is a monumental problem, and it is complicated.
First, tariffs would raise some money but not enough to make up for the revenue reductions from the tax cuts endorsed by Trump, non-partisan analysts say.
Compared with the size of the economy – actually, as a fraction of annual gross domestic product (GDP) – this year’s deficit is larger than it has ever been in a period without a war or a major crisis: more than 6 per cent and rising. The total US debt is 123 per cent of GDP, an extraordinarily large amount. And Trump’s fiscal policies seem likely to enlarge these numbers.
It is certainly possible that major government spending cuts will result from Trump’s new, unofficial Department of Government Efficiency, an advisory body headed by Elon Musk, the world’s richest man, and Vivek Ramaswamy, a former pharmaceutical executive who sought the Republican presidential nomination.
But more likely, I think, as long as military spending, Medicare and Social Security remain sacrosanct, as Trump promises, the commission’s recommendations will not be enough to reverse the widening budget deficit.
This outlook helps to account for a sharp rise in bond interest rates since September, when the Federal Reserve began trimming the short-term rates it controls. Fed officials have begun hinting that they are in no hurry to cut further. And the Trump policies could easily induce longer-term rates to keep rising.
Consumers and investors
That would not be good for consumers. Mortgages, whose rates are in the 7 per cent range for 30-year loans, would become more expensive.
In September, the Fed projected that the federal funds rate would drop to 3.4 per cent by the end of next year, but reaching that goal has gotten harder.
With the expectation that US interest rates will not fall much further, the US dollar has been strengthening – even though Trump says he favours a weaker US dollar.
If he goes ahead with his tariff promises, countries hit by the levies would have incentives to weaken their currencies further, to make their products more competitive. A stronger US dollar helps Americans travelling abroad, but it hurts consumers at home and big corporations with international operations.
These are just a few examples of a complex analytical problem: The Trump victory may well be associated with a rising stock market because the market gains in most presidential administrations, but it is not a win-win for the markets. There are endless complications internationally, too, but let’s save that for another day.
Across a broad range of industries, change is coming.
Healthcare stocks have been slumping. But shares of Henry Schein, a company on Long Island, New York, that supplies goods and equipment to dentists, as well as shares of two of its competitors, have been on fire in recent days.
Why? Partly because Robert F Kennedy Jr, whom Trump has nominated as secretary of the Department of Health and Human Services, wants to remove fluoride from drinking water, a move that may be bad for public health but great for the business side of dentistry.
At the same time, cryptocurrencies are soaring, perhaps because Trump, Musk and other newly empowered figures say they favour lighter regulation, if any, of digital assets. Pronouncements from Trump associates will be swaying the markets.
For most investors, the heightened uncertainty has some essential implications. Stick to basics. Settle on a plan and stay with it. If you are a long-term stock investor – perhaps using low-cost diversified index funds, as I do – try to remain in the market, even if it gets rough. Prepare by holding enough safe investments to pay the bills, and ride out any turbulence.
If interest rates rise, bond prices will fall as a function of bond math, so bond funds may lose money. Short-term Treasury bills, money-market funds and shorter-duration bonds may be a better bet for the cash you may need soon.
Fortunately for investors, Trump follows the stock market closely and wants it to rise. On this score, he has a great record. Aside from the havoc caused by the pandemic in 2020, the first Trump administration was excellent for the market. While he was in office, the S&P 500 returned more than 81 per cent, including dividends. It has prospered under President Joe Biden, too, with a total return of more than 64 per cent.
Wherever the Trump administration takes us, remember that the market has done well under most presidents, regardless of party affiliation or policies.
Companies such as Nvidia, which makes the advanced chips that run artificial intelligence, are turning in strong performances. As long as corporate earnings accelerate, the bull market may manage to keep its swagger.
Share with us your feedback on BT's products and services
