As the Trump 2.0 administration takes shape, the new government is taking action on multiple political fronts simultaneously. Historically, a new administration focuses on the dominant policy each year — tax reform in 2017, trade war in 2018, COVID-19 in 2020, and industrial policies such as the CHIPS Act in 2021. However, this time the noise-to-signal ratio is exceptionally high. Investors have to focus on what is known and what matters.
Market performance under the new administration
Historically, the first year of each US president’s time in office has been positive for stocks, provided it was not a time of recession. The last four cycles brought an average gain of +20% in the first year, while the second year usually faced more significant challenges.
Financial stocks outperformed the S&P 500 in every presidency’s first year since 1973, except for 2009. Health care-related stocks also outperformed in the first year of every Republican administration since Reagan took office in 1981.
##Trade and tariffs: potential winners and losers##
Trade policy discussions are based on “known unknowns” due to many ambiguities and variables. However, one thing that’s clear is that currency markets are the first to reflect changes in trade policy. Currently, markets are betting on a scenario of widespread implementation of global tariffs.
Trump uses the threat of reciprocal tariffs to force countries into direct negotiations, as was the case in his talks with Indian Prime Minister Modi. If these tariffs are implemented, emerging markets like India, Argentina, Mexico, Brazil, Vietnam, Taiwan, and Indonesia will be hit hardest.
Assuming such an international climate arises, the services sector is predicted to outperform the goods sector. The “winners” will be companies benefiting from border adjustment tax policies, including Boeing and General Electric as well as financial institutions like Bank of America and JP Morgan. Conversely, companies like Walmart, Nike, and Toyota may encounter difficulties due to disruptions in supply chains.
However, China remains an entirely separate case. Trump has made it clear he doesn’t want American companies operating in China, putting pressure on businesses heavily involved in that region. It’s also worth noting that a weaker US dollar would favor stocks outside the US, and European markets are already preparing for an end to the war in Ukraine.
Fiscal Policy: tax cuts, spending, and debt
If Congress passes tax cuts without offsets, the bond market could react negatively, leading to higher yields, especially if persistent inflation, tariffs, and a budget deficit continue. As such, Trump is likely to focus on reducing government spending through DOGE, which may put pressure on sectors like consumer goods, energy, education, and transportation, while defense sector stocks stand to benefit.
In the first half of 2025, markets are likely to be supported by liquidity provided by the US Treasury. After hitting the debt ceiling on January 21, the government continues to meet its obligations without issuing new debt securities, generating a liquidity impulse of $400-500 billion, similar to quantitative easing. This should keep financial conditions loose until Congress raises the debt ceiling.
Treasury Secretary Scott Bessent indicated that the key indicators for the new administration are the yield on 10-year Treasury bonds, oil prices, and gold prices. Investors should closely monitor these data to assess the direction of economic policy.
By Lale Akoner, Senior Analyst at eToro.
Source: https://managerplus.pl/trump-2-0-scenariusze-rynkowe-ktore-znamy-do-tej-pory-28968
