- Trump 2.0 Scenario Becomes Increasingly Complex: The initial market perception of Trump’s second term as pro-growth and inflationary is being reassessed. As markets delve deeper into the evolving political landscape, it becomes evident that the economic trajectory is more intricate than initially predicted.
- Tariffs First, Tax Cuts Later: Trump’s recent cabinet appointments, including key proponents of a hawkish stance on China, signal a greater focus on trade and tariffs rather than tax reforms. While tax cuts are likely in the pipeline, they will require Congressional approval and face fiscal constraints, making them a secondary priority for now.
- Tariffs Are Risk-Negative: Emphasis on tariffs introduces uncertainty and volatility in the market, particularly in sectors heavily reliant on global supply chains. High-beta stocks, including small-cap companies and cyclical sectors, are especially vulnerable to trade disruptions. Global markets, particularly China/Hong Kong, will feel significant impacts as trade tensions escalate, posing downside risks for equities, especially those tied to international trade.
- USD as a Safe-Haven Currency: Amid downward pressure on currencies like CNH and EUR, triggered by escalating trade tensions, the US dollar is gaining strength as a safe haven.
As Trump’s policies take shape, one thing is clear: tariffs are becoming a priority, signaling potential escalation in trade tensions even before tax cuts are implemented. This shift carries far-reaching consequences for equity, bond, and currency markets.
How can investors tactically adjust their portfolios in response to Trump’s new strategy? First, they must understand its complex effects, which are likely to have the most significant impact on different asset classes.
Tariffs: Inflationary but Growth-Negative
Trade war scenarios typically increase market volatility as the trade agenda intensifies, potentially affecting sectors and regions most at risk from tariffs.
Market Implications:
Equities: The focus on tariffs is generally risk-negative and impacts growth, corporate earnings, and particularly sectors dependent on global supply chains.
- US Equities: High-beta sectors and small-cap companies (e.g., Russell 2000) are particularly vulnerable, as supply chain disruptions impact them more severely. Defensive sectors such as consumer staples, healthcare, utilities, and select retail firms with lower foreign production exposure may prove relatively more resilient.
- International Markets: Significant impacts are expected for equities in China/Hong Kong due to direct trade exposure, along with weaker conditions in Asia and other regions that serve as intermediaries for China, such as Europe and Australia.
Bonds: While tariffs may create some inflationary pressures, their impact on growth could offset this, supporting bonds with potential yield curve flattening.
Currencies: The US dollar could strengthen as a safe haven, while high-beta and cyclical currencies like EUR, CNH, AUD, and MXN may weaken under trade pressures.
Tax Cuts: Pro-Growth and Inflationary
Once implemented, tax cuts could boost domestic economic growth and benefit US-focused sectors at the expense of those more reliant on global markets. Likely beneficiaries include small-cap companies and cyclical firms that stand to gain from reduced tax burdens.
Market Implications:
Equities: Small-cap stocks (such as those in the Russell 2000) and cyclical sectors may benefit from tax cuts, but gains could be limited by broader trade and fiscal risks.
Bonds: While tax cuts may push yields higher, growth uncertainties in the context of tariffs could counteract this effect.
Currencies: Growth driven by tax cuts would support the US dollar, especially as other economies face trade-related slowdowns.
Deregulation: Less Macroeconomic, More Sectoral Effects
The Trump administration also signals a renewed focus on deregulation, potentially acting as a pro-business catalyst across various sectors. This is expected to simplify operations in industries like energy, finance, and manufacturing, reducing costs and potentially boosting domestic growth. While deregulation generally supports the business environment, its effects are nuanced across asset classes, especially in light of ongoing tariff pressures.
Market Implications:
Equities: Deregulation positively impacts US equities, particularly in sectors such as energy, financial services, and manufacturing, where regulatory costs have historically been significant. Simplified regulations in these sectors could lead to greater operational efficiency and improved profitability.
- Energy: Oil and gas companies could benefit from environmental deregulation, while the renewable energy sector might suffer if tax incentives for clean energy are removed.
- Finance: Banks and financial services could gain greater flexibility in lending, capital requirements, and investment activities, potentially boosting financial performance.
Bonds: Economic growth stemming from deregulation could exert moderate upward pressure on bond yields if it leads to higher corporate profits and increased economic output.
Currencies: Growth-driven narratives from deregulation strengthen the positive outlook for the US dollar in the medium term, reducing the likelihood of Federal Reserve rate cuts.
Trade Policy Becomes Urgent
Tax policy often takes longer to materialize, as it requires Congressional approval. Some members may be concerned about record debt levels and deficits. As a result, tax policy changes, when implemented, may be more limited in scope than promised during the campaign. In contrast, US trade and tariff policies can often be shaped—and sometimes directly implemented—through presidential executive orders. With cabinet appointments like Marco Rubio and Mike Waltz signaling a tough stance on China, tariffs appear to be an immediate focus for the Trump administration.
In conclusion, investors should approach equity markets cautiously, as tariff-related headlines are likely to be risk-negative in the short term, outweighing the positive impact of tax cuts. Nonetheless, regardless of outcomes in this arena, the US dollar stands to benefit from multiple supportive factors, including Trump’s trade policies, fiscal measures, Federal Reserve actions, and geopolitical risks. This dynamic explains the US dollar’s sustained strength, even as US equities struggle to reach new highs. Dollar resilience is expected to persist, making it a key beneficiary of the current macroeconomic environment.
Commentary by Charu Chanana, Chief Investment Strategist at Saxo.
