Trump 2.0 – Implications for markets

The implications of a second Trump presidency could significantly shape the U.S. economy, the global economy, financial markets, and financial assets. Investors and policymakers are bracing for potential shifts in fiscal and monetary policy, as well as broader economic trends that are likely to unfold over the coming years.

U.S. Economic Outlook

A Republican “red sweep” — control of the White House, Senate, and the House — has sparked expectations of substantial tax cuts, deregulation, and other pro-growth policies. A cornerstone of Trump’s economic plan is likely to be an extension of the 2017 Tax Cuts and Jobs Act (TCJA), benefiting both individuals and corporations. Lower taxes, coupled with anticipated deregulation, especially in sectors like banking and energy, could catalyze corporate spending, particularly benefiting small enterprises that rely heavily on the domestic U.S. economy. While these measures could fuel U.S. GDP growth, they may come with a high fiscal cost, potentially adding an estimated $5 trillion to the national debt by 2034. Higher deficits, combined with proposed tariff increases and a restrictive immigration stance, could introduce inflationary pressures, driving up interest rates over the longer term.

Global Economic Impact

Trump’s trade and immigration policies are expected to have mixed effects on the global economy. Tariffs, which he has suggested as a possible bargaining tool, could lead to heightened trade tensions with key partners, potentially hurting global trade. U.S. tariffs on imported goods might raise prices domestically, thereby impacting U.S. consumers, while also increasing costs for foreign exporters. Additionally, stricter immigration policies may lead to labor shortages in certain industries, further driving up domestic inflation. The overall impact on global markets would depend on how other economies react, including potential retaliatory tariffs, but the U.S. adopting a more isolationist stance may push other countries to strengthen trade relationships outside the U.S., potentially diminishing American influence over time.

Impact on Financial Markets

U.S. equity markets have responded positively to the Trump win, with investors betting on policies that could enhance corporate profitability and economic growth. Stocks, particularly in cyclical sectors such as financials and industrials, surged post-election. U.S. regional banks, for example, saw a notable uptick in valuations, fueled by hopes for lighter regulatory restrictions and looser capital requirements. Mid-cap stocks, which have underperformed relative to large-cap tech stocks in recent years, are also expected to benefit from Trump’s potential fiscal policies, encouraging a shift in market leadership from tech to more value-driven, cyclical assets. However, increased national debt and potentially higher interest rates in response to inflation could create a counterbalancing force, putting valuation pressure on fixed-income assets and possibly dampening the rally in equities over time.

Federal Reserve Policy and Interest Rates

The U.S. Federal Reserve (Fed) cut its policy rate on November 7^th by 25 basis points (bps) following its 50bps reduction in September, but Chair Jerome Powell emphasized a cautious approach, stating future policy changes would be based on actual economic data rather than preemptive assumptions. Nevertheless, Trump’s proposed policies may prompt the Fed to adopt a more conservative rate-cutting path, as inflationary pressures mount with potential fiscal stimulus. Markets are now pricing in fewer rate cuts than before, as a Republican-led White House could introduce a pro-growth agenda that mitigates the need for aggressive monetary easing. If inflation proves more persistent than anticipated, the Fed could maintain higher interest rates to contain it, resulting in a “shallower” rate-cutting cycle. Such conditions would present opportunities for investors to secure relatively high bond yields while potentially benefitting from the stable income of longer-term debt instruments.

Outlook for Financial Assets

A second Trump administration’s policies are generally seen as favorable for U.S. equities and certain bond markets. The potential for sustained economic growth, tax cuts, and deregulation could continue to fuel a bull market, as indicated by the strong post-election rally and record highs in the S&P 500. While equities might benefit in the near-term, higher deficits and inflation expectations could exert downward pressure on bond prices, especially on longer-dated U.S. Treasuries. Investors may, however, look to lock in higher bond yields to hedge against future rate volatility, while repositioning into longer maturities in anticipation of lower future yields.

Long-Term Focus

For investors, maintaining a long-term focus will be critical as the market adapts to changes in policy. While short-term rallies may reflect optimism around Trump’s pro-growth agenda, balanced portfolios grounded in economic fundamentals are more resilient to volatility. Diversifying equity allocations, particularly in value and cyclical stocks, and positioning fixed-income portfolios to take advantage of current yields could support long-term goals.

In conclusion, while a second Trump presidency promises policies that favour U.S. growth and corporate profits, rising debt and inflation concerns may offset some of these benefits. Investors should avoid reactionary portfolio changes, instead staying focused on economic fundamentals and aligning allocations with their long-term financial objectives.

Eugene Stanley is Vice President, Fixed Income & Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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