Trump is president of the US again, his second bite of the cherry after a brief four-year interlude playing golf and ducking and weaving court cases. Despite expectations of a close contest, the result was a comprehensive ‘Red Sweep.’ Trump won all seven key swing states, and the Republicans regained the Senate and maintained the House. Consequently, Trump has a clear runway to implement policies without the need for bipartisan support. The question is, will he?
Will campaign promises and policies be implemented?
If last time around is anything to go by, no, not completely. According to www.politifact.com, Trump kept 23% of his 2016 campaign promises, compromised on a further 22% promises, and broke 53% promises (not sure on the other 2%!). Obama kept 48% of his promises, compromised on 28%, and broke 24%. Having said that, the last time Trump was elected he was a newbie in the role and encountered more political headwinds than he probably expected, hampering his policy agenda. This time around, he’s ‘battle hardened’ and has surrounded himself with loyalists rather than selecting from within the party ranks.
Under Trump, economic nationalism will replace globalisation. Tariffs of 10% - 20% are proposed on all imported goods & services, with 60% on anything from China. The aim is to make more ‘stuff’ in America. While Trump will likely impose tariffs as proposed, there will be concessions. Negotiations will be had, deals will be done, it’s his way. Most tariffs will likely be targeted at trading partners that the US has a deficit with, or where US industries compete against. In the case of China, one of their top three trade deficits, the tabled 60% tariff is likely an ambit-claim ahead of broader negotiations.
Trump has promised to extend tax cuts he enacted when he was last president, which are due to expire next year. Further cuts are likely. The corporate tax rate went from 35% to 21% in 2016 (vs a policy target of 15% at the time). He’s promised less red tape and to reduce regulatory hurdles, particularly in banking and the resources sector. Lastly, he has committed to tearing up the Paris Agreement.
Illegal immigration was again a key plank in his election platform, with mass deportations of illegal immigrants on the cards. There will likely be a flow-on effect in labour markets, i.e. less cheap immigrant labour, which again is inflationary. I’m not going to dwell too much on this policy here. While there will be some economic impact, it’s more a domestic policy with less tangible global or market implications.
On the geopolitical front, Trump has promised to end the Ukraine war, not sure how though. He has threatened to walk away from NATO if member nations don’t begin pulling their weight on defence spending (cue higher debt issuance to fund military upgrades). Taiwan is also on notice. At the end of day, Trump is a businessman. For Trump, everything is a transaction. Traditional alliances are likely expendable, particularly if it’s for the benefit of the US.
Are there any market lessons from Trump’s first presidency in 2016?
Trump is Trump. He still shoots from the hip, frequently heading off script and proclaiming broad policy ideas without thought for the details. He is still very much pro-growth, which is evident in his enduring policies of further tax cuts, broad based trade tariffs, and plans to deregulate key sectors.
When last elected, US stocks rallied over the following year (tax cut hopes), while bond yields rose (reflecting likely inflationary pressures). At the time the S&P 500 was trading at a forward PE ratio of 18.3x (vs 10Y average of 15.2x). Over the first 12 months on from winning the presidency, S&P 500 gained +21.1%.
This time around, the S&P 500 is trading at far loftier valuations, with forward PE of 24.9x and the index sitting at all time high. At face value, given the already elevated starting position, and much higher bond yields, repeating 2016 – 2017 gains this time around will be more challenging. A big advantage is the fact that other markets, such as Europe, UK, and China have broadly weakened on their own softening growth outlooks compared to 2016 - 2017. Trump’s trade policies will only exacerbate their problems. As such, on a relative basis, global investors will likely be attracted to US markets over others.
In fixed income markets, US treasury yields rose ~60 bps (from 1.80% to 2.40%) over the year to November 2017, with the majority of increases coming in the first month or two after the election. A month after Trump was elected, the Fed hiked rates 25 bps, and then seven more times after that over Trump’s presidency, up to 2.50%. Then COVID hit and emergency cuts were enacted.
Similarly, treasury yields are much higher this time around, with 10Y yields around 4.30%, up 75 – 80 bps since the middle of September, arguably already pricing in inflationary pressures from the election outcome. How much further they go will be dependent on fiscal stimulus and inflation triggered by the foreshadowed trade wars. It’s likely yields will trend higher over the coming year.
A key point of difference now vs then is the macro starting point. Inflation was well under Fed targets in 2016 (US CPI at 1.6% YoY vs +2.0% YoY target) and official cash rates were at or near all-time lows (Fed Funds Rate at 0.50%). Today inflation (core US CPI at +3.3% YoY) is well outside target ranges and official rates are materially higher (Fed Funds Rate of 4.70%).
US growth (real GDP) was +1.80% YoY in 2016, rising to +2.50% YoY in 2017, and +3.00% YoY in 2018. Growth moderated in 2019, to +2.50% YoY before COVID hit. This time around growth is at a better starting point, +2.80% YoY, with more fuel to add to the fire once Trump’s slides his feet under the Resolute desk in January next year.
What can we expect from here?
In a word, uncertainty! The big unknown is policy reality vs campaign policy promises. How much will be formalised into policy. I’d suggest more than last time, but not as far as proposed. Having said that, he has spent a lot of time promoting tariffs, far more than he did heading into his first term. He has clearly become a lot more infatuated with tariffs as a policy. The details, however, do not appear to have received a lot of attention, and this is where the uncertainty comes from. Further complicating things, how will America’s trade partners respond?
His policies are inflationary and pro-growth, will the latter compensate for the former? While stocks will likely trend higher in that environment, treasury yields will also head north through 2025 and end higher than where they started. Further, I’d suggest the scale of expected rate cuts from the US Fed will continue to be pared back as policies are formalised and the Fed assesses the likely economic impact. Trump is appointing loyalists to key roles rather than Republicans, which likely reduces any moderating influences vs last time.
US stocks have jumped out of the gate, with underlying corporate margins expected to benefit from proposed tax cuts, deregulation, and higher tariffs, at least in the near term. However, there are plenty of potential negatives the market seems to be ignoring as well. Specifically, the impact of tariffs on inflation and the impact on labour supply from mass deportation of illegal immigrants. Elsewhere, gains have been much muted as Trump’s policies will likely weigh on trading partner growth amidst their own existing challenges, i.e. Europe and China. Australia holds a trade surplus with US, but are heavily leveraged to China, which creates challenges.
And for Australia? Any hit to China growth will weigh on the local economy, so trade talks there will be closely watched. The AUD is expected to weaken as a consequence of high treasuries and weakening commodities outlook on waning China growth, which will weigh on mining stocks. Global inflation will hamper the RBA’s inflation finding agenda, with the very real prospect of no rate cuts until well into the end of the year, or even into 2026. Credit spreads are tightish, so any shocks or surprises could cause some widening pressure, but momentum right now is sideways to slightly tighter. As with stocks, we’re starting at a point in the cycle where there is less of a buffer to absorb surprises.
