If Wall Street learned anything during Trump's first presidency, it's that the stock market is a way for him to keep his books. He has repeatedly taken credit for stock market gains, urged Americans to buy the dip and even considered firing Federal Reserve Chairman Jerome Powell for blaming him for the stock market's decline.
Now, as he prepares to return to the White House, markets are once again his focus. The problem is that he has also brought with him a series of economic policy proposals that many strategists believe increase the risk of higher inflation and slower economic growth.
So for investors enjoying the S&P 500’s more than 50% gain since the start of 2023, the best hope for keeping the market rolling into 2025 and beyond may be that Trump is afraid to do anything to derail the rally.
Presidential Protection
"Trump considers stock market performance an important part of his scorecard," said Eric Sterner, chief investment officer at Apollon Wealth Management. "During his first presidency, when the market was going high, he would often open his speeches with 'how's your 401K?' So he obviously doesn't want to enact any policies that threaten the current bull market."
The S&P 500 soared after Trump's victory on Nov. 5, posting its best performance ever since Election Day. Bank of America strategists used data from EPFR Global to show that $56 billion flowed into U.S. stock funds in the week ended Nov. 13, the most since March. Despite a pullback last week, the S&P 500, the tech-heavy Nasdaq 100 and the Dow Jones Industrial Average have all set multiple records since Election Day.
It is worth noting that Trump’s campaign promises are not investor-friendly in the usual sense.
Those measures include: imposing high tariffs that could strain relations with major trading partners; large-scale deportations of low-wage undocumented workers; tax cuts for corporations and wealthy Americans that are expected to increase the national debt and widen the budget deficit; and sweeping protectionist measures aimed at bringing back manufacturing that costs more than overseas.
These risks are no secret and have been widely discussed in the investment community. So where does the enthusiasm come from? It’s simple. Wall Street doesn’t believe Trump will tolerate a stock market decline, even if it’s caused by his own proposals.
“If some of these policies start to impact his popularity and start to impact the stock market in a way that he views as negative, I think he’ll pivot,” Emily Leveille, a portfolio manager at Thornburg Investment Management, said in an interview.
Investors are most closely watching the possibility of additional tariffs because Trump frequently used them as a negotiating tool during his first term, threatening to impose them only to quickly backtrack when markets reacted with a sell-off.
This time, Trump is proposing tariffs of 10% to 20% on imports from all countries. Even lower tariffs could cause a 10% pullback in U.S. stocks and single-digit earnings for the S&P 500, according to a team of strategists at UBS Group AG.
Barclays strategists believe that widespread tariffs combined with proposed tariffs of 60% or higher on Chinese goods would reduce S&P 500 earnings by 3.2% in 2025.
“It’s one thing to threaten tariffs to gain leverage in trade negotiations, but it’s another to impose them,” said Mark Malek, chief investment officer at Siebert & Co. “Trump’s sensitivity to the stock market should theoretically moderate his approach.”
Wall Street leaders like JPMorgan Chase CEO Jamie Dimon appear to agree, telling reporters at the APEC CEO summit in Peru on Thursday that he believes President-elect Trump wants to avoid a stock market rout over tariffs.
Still, investors are fleeing risk, dumping shares of companies expected to be hit by the levies. The Nasdaq Golden Dragon China Index is down 8.9% since Election Day. Shares of Coca-Cola and PepsiCo are down about 5.5% each over the same period. Hasbro is down 7.1%.
It’s not 2016 anymore
Of course, historical analogies may not matter, because the situation in 2017, when Trump first took office, was very different from now. Back then, the S&P 500 was just coming off a 9.5% gain in 2016 and a small loss in 2015. This time around, the index has surged for two years in a row, jumping 53% since the end of 2022. In 2024 alone, it set more than 50 records.
Interest rates were also much lower in 2017, with the Fed funds rate ranging from 0.5% to 0.75%, compared with a range of 4.5% to 4.75% now. Trump may not get much help from the Fed after Powell said last Thursday there was no need to rush for more rate cuts following cuts at the September and October meetings.
High stock valuations and tight financial conditions could limit Trump’s ability to stimulate the economy and stock market as he did during his first term, when he passed a $1.3 trillion spending bill that increased spending on domestic programs and cut taxes by $1.5 trillion.
“Trump will not be able to replicate the fiscal stimulus of his last term,” Marko Papic, chief geopolitical strategist at BCA Research, wrote in a note to clients last week. “Trump 2.0 will curb immigration and be forced to curb fiscal policy, two of the pillars of the U.S.’s outperformance relative to the rest of the world.”
That risk, at least for now, is mostly reflected in the bond market as traders bet on a sell-off in Treasuries following a Trump victory. How much the market can tolerate is a key question, said Ed Yardeni, president and chief investment strategist at Yardeni Research.
“If bond yields were to rise sharply on fears of inflation and rising deficits, then clearly the stock market was wrong,” he said.
A final, counterintuitive risk is that Trump becomes overly sensitive to market moves. Siebert’s Malik argues that intervention can also be destabilizing, which is generally bad for stock prices.
“Markets are notoriously temperamental,” he said. “If Trump overreacts to daily market moves, as he did during parts of his first term, he and many others could find themselves whipsawed.”
Article forwarded from: Jinshi Data