Why Trump’s many erratic Cabinet nominations have the markets on edge
Economists say that his economic policies are likely to cause more harm than good
THE initial sugar high of Donald Trump’s election victory has already worn off on US markets, as investors look beyond the short-term boost of corporate tax cuts to the administration’s destabilising effects on global economics and politics.
Several concerns about a second Trump administration have weighed on Treasury bonds and caused some indices to give back some of their post-election gains.
There are also worries about Trump’s erratic picks for many key cabinet posts – a rogues’ gallery that would look more at home on the set of Celebrity Big Brother than in a White House conference room.
Wall Street economists and some international financial institutions said Trump’s economic policies are likely to cause more harm than good after he is sworn in on Jan 20 next year.
The first signs of cracks in the post-election rally came when Trump started nominating people for his new Cabinet, some of whom had rap sheets longer than their qualifications.
The likes of Fox News personality Pete Hegseth (for defence secretary), controversial Florida Congressman Matt Gaetz (nominated to be attorney-general but who has since withdrawn) and wrestling personality Linda McMahon (for education secretary) gave the market an initial jolt.
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The president-elect’s decision to nominate Robert F Kennedy Jr as his new health secretary was another example of how a decision could move the market.
Shares of vaccine manufacturers such as Moderna, Novavax and Pfizer plunged after that announcement was made on Nov 14.
Kennedy’s proposed cabinet role also weighed on the shares of snack giants such as Pepsico.
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The former environmental lawyer has long been known to be a vaccine sceptic and is a firm advocate of healthy eating.
The choice of Howard Lutnick, chief executive of Cantor Fitzgerald, as commerce secretary was less of a head scratcher, but another that gave cause for concern. Lutnick was the lone voice on Wall Street advocating for the use of tariffs to protect US workers and the industries that employ them.
Tariff policies
“Trump’s tariff policy, if it’s fully implemented to the extent he said he wanted it to be during the campaign, would prove to be reckless, inflationary and potentially destabilising – not only from an economic standpoint, but a political one too,”
Parker Hevron, associate professor of political science at Texas Woman’s University
Those betting on this “America First” approach to world trade should look at the Russell 2000 index of small-cap stocks, said JJ Kinahan, chief executive of IG Market and president of its brokerage tastytrade.
Intuitively, the smaller domestic manufacturers and banks that comprise the Russell would find life easier if overseas competitors were shut out.
But the Russell 2000 index has been volatile since election day on Nov 5. It has surged by about 10 per cent before giving back more than half those gains following warnings from economists at Bank of America Global Research that the protected industries would suffer more from the fallout of any trade war than they would benefit from it.
“Trump’s tariff policy, if it’s fully implemented to the extent he said he wanted it to be during the campaign, would prove to be reckless, inflationary and potentially destabilising – not only from an economic standpoint, but a political one too,” said Parker Hevron, associate professor of political science at Texas Woman’s University.
Trump’s tariffs did “prove politically palatable” to the Democrats, but that was because of their targeted nature. To most economists, blanket tariffs of 60 per cent on all Chinese goods sound like overkill.
Recently, new Boeing chief executive Kelly Ortberg bluntly warned employees that the company would be hurt by tariffs because they are bound to cause a response from China, currently the world’s largest jet market.
Corporations have seen this movie before, during the last Trump administration. Every time Washington raised tariffs on Chinese aluminum or steel, Beijing made a symmetrical move in soybean or other import markets.
As Ortberg pointed out, aerospace is a natural place for retaliation because China has no skin in the game and nothing to lose from pivoting to a non-US competitor such as Airbus.
Boeing is not the only concerned party. Many European automakers have lost value since the Trump victory. Employees of French company LVMH Hennessy have gone on strike at the conglomerate’s cognac distillery due to rumours that the company is considering moving operations to China in a response to the likely trade war.
Investment strategists are almost as starkly divided as the electorate on Trump’s abilities as a steward of the stock market.
Corporate tax cuts
Corporate tax cuts, all but guaranteed given that Republicans control all three houses of government, are a simple question of “mathematics”, said JD Joyce, president of Texas-based financial advisory Joyce Wealth Management.
Instead of a 21 per cent tax, corporations will soon pay 18 per cent or less. That, combined with less costly regulations, translate directly to a Trump bump on the bottom line, said Joyce.
To be sure, the stock market will get a short-term lift from such moves. On the Treasury market, however, the focus is on the US government’s bottom line, where the outlook does not look as rosy.
The yield on the 30-year bond has risen steadily since Trump’s victory. The president-elect is not cutting back on any of the increasingly expensive welfare spending that keeps the growing retirement-aged population afloat.
Most economists anticipate the deficit widening by US$1 trillion a year in this circumstance. That kind of reckless spending could cause elevated Treasury yields to rise further, which would eventually start to haunt the stock market.
One strategist said it would depend on which parts of his agenda that Trump moves on first. If the focus is on tax cuts, tariff plans and mass deportation plans could fall by the wayside.
“We will see when Trump actually takes office. You can only have so many priorities,” said IG Market’s Kinahan.
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