Trump's Policies
In our Alpha report, we reiterate that we expect President Trump to curb his most enthusiastic plans for tax cuts due to the pressure from the bond market. That will be good for equities in the long run – as it will assuage the pressure on yields. However, it should be negative for the USD as investors grapple with far less fiscal support for the US economy over the next four years than expected. We also give our readers a blueprint for following the news flow when it comes to trade policy. Stick to a framework and ignore tweets.
Trump's policies aim to support domestic producers and will be pro-growth and inflationary, at least initially. This environment is supportive of equities. Earnings will likely be strong, but elevated valuations make equities prone to a correction. Earnings growth broadening will translate into performance broadening – the S&P 493, Cyclicals, Value, Small and Mid are likely to outperform.
- Congress will pass tax cuts by end of 2025 producing a fiscal thrust of about 0.9% of GDP in 2026.
- Trump will count on that stimulus as a basis for slapping tariffs on leading trade partners.
- China will retaliate against Trump and stimulate its domestic economy, while pursuing stronger trade ties with other countries. Europe will also retaliate.
- Geopolitical risk will shift from Ukraine-Russia to Israel-Iran, where the conflict will continue to escalate until a crisis point is reached within 2025.
Investors are overstating the positive fiscal impact of the Trump presidency. The bond market will have something to say about the scope for further deficit expansion via tax cuts. As such, the trade after the trade of the Trump 2.0 administration may involve less growth out of the US, not more. In the interim, however, investors should continue to expect higher yields and increased equity volatility. There are plenty of risks ahead, including geopolitics, trade, and uncertainty surrounding fiscal policy.
Ultimately, 2024 is not 2016 — a seemingly obvious point, but one with market relevance. In 2016, voters gave Trump a strong mandate for nominal GDP growth. It is not clear if this is the case today. Inflation is the most important issue, least relevant is trade and globalization. As such, Trump’s renewed mandate is for supply side reforms, not more populism and protectionism.
Trump’s resounding victory brings a popular mandate that ensures deregulation and higher trade tariffs. Higher budget deficit and immigration reform are also in the cards as the Republicans look like they may squeak a thin margin in the House of Representatives. Foreign policy will become more unilateral, with US assets outperforming initially.
The market is celebrating the prospect of deregulation, lower taxes, and Fed rate cuts, for now ignoring the dangers of wider budget deficits, inflationary pressures, and trade wars. The rally can continue into the year-end and reduced uncertainty, seasonality, and positive momentum will benefit recent laggards such as Small, Value, and Cyclicals. We downgrade Energy from overweight to underweight. We downgrade Telecoms and Consumer Staples to underweight. We upgrade Insurance from underweight to overweight. We upgrade Utilities to overweight.
The most likely outcomes for the US elections are a “Red Sweep” and a “Blue Gridlock.” The following is a brief discussion of likely policies associated with each election outcome. We also present a post-election US Equities Cheat Sheet, in which we summarize winning trades for each scenario over the tactical investment horizon.
The Trump trade is just a trade, not an investment, and a risky trade at that. It wagers simultaneously on a soft landing and a Trump victory. Yet Trump's victory is more likely amid slowing economic growth than a soft landing. Investors should position for the slowdown first, then the trade shock, and only then take on more risk in the form of “Trump trade winners.”