Trump 2.0: Complex policy outlook makes for dynamic markets

Donald Trump’s election for a second term is likely to have important policy ramifications for cross-asset markets, not only in the immediate aftermath of the election, but also throughout his term.

Specifically, Trump is likely to focus on three initial key initiatives during his first days in office:

• - Implementing global tariffs.
• - Curtailing immigration.
• - Pushing additional deregulatory policies.

Also important for investors will be the administration’s (and congressional) focus on the Tax Cut and Jobs Act (TCJA), which is set to expire at the end of 2025 and will likely be on the agenda during the first half of the year if the Republications secure control of the House of Representatives.

We believe Trump will look to use the threat of imposing tariffs on China and the rest of the world earlier in his second presidency compared with his first. While an eventual 60% tariff on imported goods from China and a 10% tariff on imported goods from rest of the world are unlikely to materialize in full, the threat of imposing such significant tariffs — or a partial realization — is likely to cause markets to be concerned about short- and medium-term upside inflationary pressures, with investors likely seeking inflation-protected products and assets. Concerns over upside inflation is already impacting market pricing for the Federal Open Market Committee's easing cycle, and we believe implementation (or the threat of implementation) of these tariffs could cause the FOMC to slow and or stop its easing cycle as early as January 2025, putting short-end nominal duration at risk.

Trump’s focus on immigration, and the supposed removal of undocumented and alien immigrants will also likely be a focal point for the incoming administration. Unlike Canada, where the impact of immigration has been known and watched for years, the immigration impact on the US economy is, somewhat surprisingly, a relatively new phenomenon many watchers only began paying significant attention to over the past year. The generally accepted view is US immigration has boosted headline employment data and has acted as a moderate to strong tailwind for the underlying economy. Accordingly, a significant deterrent to further immigration by the administration, coupled with deportation of prime-aged workers is very likely to have a slowing effect on employment, consumption and the economic outlook. These policies, in theory, go against the general market perception Trump policies are “good for the economy” that tend to lead to strong nominal GDP, and are generally seen as constrictive for corporate earnings. Importantly, a slower economy and less demand for goods and services would in theory help offset some of the higher inflationary pressures brought on by tariff-induced inflation.

Deregulation is also likely to be a key plank in the Trump administration’s first days in office, and in particular deregulation in financial services sector, as well as deregulation around the energy sector where it is widely believed the administration will allow drilling for  natural resources on federal land. Accordingly, the market is becoming increasingly bullish not only on the prospect of additional corporate M&A activity, but also allowing banks to take on additional balance sheet risk. On the energy side, additional oil supply, coupled with a Trump administration which is generally seen to be on friendlier terms with Saudi Arabia than the Biden administration, should have a negative impact on spot oil prices, although the initiatives around physical drilling will take some time to logistically implement.

Additionally, confirmation of a “Red Sweep” with Republicans winning control the House of Representatives will give the GOP near-total control over tax policy and likely accelerate the discussion around TCJA extension during the first half of 2025. Here, we expect House Republicans and the White House to push for lower corporate, personal and capital gains tax rates, along with additional fiscal stimulus. If not fiscally balanced, and if the Congressional Budget Office (CBO) deems these changes to be permanent, then long-term deficit projections will be revised higher, likely causing market speculation that the US Treasury will need to issue additional debt and increase coupon sizes in the years ahead. As a result, we see risks around holding long-end US duration, particularly nominal duration.

The policies of the incoming Trump administration will likely have a dynamic and complex impact on the economy and markets, and could potentially at times, look incongruent. Of all the above themes, cross-asset markets will most likely focus on tariffs as the key macro driver during Trump’s first days in office, as well as the threat of resurgent inflation and what it means for the Fed’s easing cycle in 2025.

We believe higher beta markets could react favourably if the administration, with the help of Congress, is able to renew passage of the TCJA in the first half of 2025, which would help offset some of the negative tone likely to come from the partial or full enactment of Trump’s tariffs on imported goods, but the timing and construct of all of Trump’s policies will be key as investors navigate the year ahead.