DPAM "Themes" vom 06.11.2024
As a second Trump term approaches, financial markets, investors, and policymakers are closely analysing its impact on the economy, monetary policy, and specific sectors. The legacy of Trump's first term (2016–2020) provides valuable insights into what may unfold in another term, but unique factors in the current economic climate—such as inflation, geopolitical tensions, and energy markets—also contribute to this complex outlook. This article examines the potential economic shifts, key policies, and market reactions associated with a Trump victory, as well as the expected impacts on sectors such as energy, technology, and finance.
Market outlook
In Trump's first term, U.S. yields rose between 2016 and 2018, mainly due to a strengthening economy and the Fed's tightening cycle. Securing a second term, markets might experience renewed upward pressure on yields and the dollar, reflecting confidence in U.S. equities and economic growth but also due to the potential inflationary impact of his programme. Notably, small-cap stocks and financials are likely to benefit, following trends observed after the 2016 victory.
Historically, the market performed strongly in both the 2016 and 2020 elections, with gains across technology and financial sectors. Trump’s victory could bring further momentum to cyclical stocks (financials, energy, etc.), with technology, defence, and traditional automakers potentially gaining as well.
While market volatility was high during Trump’s initial victory, his repeat win would reduce the element of surprise, potentially resulting in more stable financial markets.
Keep in mind, the Fed and the profit cycle matter more for the markets than the election itself. Obvious sectors to watch are renewables/energy, electric vehicle adoption, healthcare services, defence, etc.
Fiscal outlook: deficits and tax policies
The fiscal position of the U.S. has deteriorated under successive administrations, and Trump is unlikely to prioritise strict fiscal discipline. In 2017, Trump implemented significant corporate tax cuts, a boost for U.S. businesses. A second term is less likely to feature major tax cuts, though a Republican-controlled Congress may attempt to extend the 2017 Tax Cuts and Jobs Act beyond its 2025 expiry.
The "red sweep"—Republican control of both the White House and Congress—will likely lead to upside risk for rates near-term, driven by potential spending increases and tax cut extensions and resulting increases in Treasury issuance.
Economic policies
Energy policy: Under Trump's “drill baby drill” approach, U.S. oil and gas producers could see favourable conditions, especially as his policies focus on fossil fuels. While U.S. oil production has reached record highs under Biden-Harris, a Trump administration might increase production even further through deregulation and increased drilling permits. More focus on oil and gas export could benefit Europe as long as it needs large amounts of U.S. LNG. However, global factors like Saudi Arabia's production strategies and demand shifts may play a more significant role in shaping the energy landscape.
Renewables and clean energy: Trump has historically opposed policies favouring renewable energy, but his stance could be moderated by pragmatic considerations, especially if energy demand from the AI sector rises. Since Elon Musk started backing Trump, his stance on electric vehicles has softened. Also, full IRA repeal is unlikely, given Republican congressional support for certain provisions. Increased tariffs on imported clean energy equipment could temporarily disrupt renewable energy projects but may also encourage domestic manufacturing investment.
Technology and big tech scrutiny: Trump has occasionally criticised Big Tech's influence and hinted at regulatory actions, but his stance remains complex. There is potential for further scrutiny of dominant technology companies, especially regarding social media and data privacy. Trump’s administration could see tighter restrictions on international technology partnerships, particularly those with China, to safeguard U.S. technological leadership. His relationship with influential tech figures, including Elon Musk, hints at possible support for domestic tech manufacturing, even if regulatory pressures on Big Tech continue.
Trump’s inclination towards light regulation and reduced oversight could ultimately benefit the technology sector in the longer run. However, his aggressive approach could contribute to increased volatility in tech stocks as investors react to policy shifts.
Financial sector and banks: A Trump-led administration would likely relax regulatory requirements on banks, particularly under Basel III standards. Deregulation could enhance bank profitability, especially if rising rates boost bank earnings through higher interest margins. Financials may outperform other sectors, as Trump’s policies could favour domestic over international competition, benefiting U.S.-centric financial institutions over global banks.
Manufacturing and trade policy: Trump’s first term saw aggressive trade policies, including tariffs targeting China and Europe. In a second term, we might see even higher tariffs, with a focus on reducing reliance on China for manufacturing. Tariffs ranging between 10–60% on imports from China could disrupt supply chains, impacting U.S. companies reliant on foreign production while encouraging domestic investment. Earnings drag for importers will be somewhat mitigated by a shift away from China during the last six years. Trade tensions could result in a stronger U.S. dollar, affecting the profitability of exporters. In the short term, higher tariffs may hurt small-cap companies more than large corporations, as they often have less flexibility in adjusting their supply chains.
Monetary policy and the federal reserve
Under Trump, the Fed may face indirect pressures, but overall, his administration has generally maintained a hands-off approach. Trump's influence on the Fed may be strengthened by a supportive Congress. A Trump administration might favour a moderately hawkish Fed, aiming to contain inflation while supporting growth.
His victory could also lead to slightly tighter monetary policy conditions, especially if his policies drive inflation higher through tariffs and trade restrictions. In this case, investors could expect higher long-term rates, with the Fed balancing growth concerns with price stability.
Foreign policy and geopolitical risks
The ongoing U.S.–China rivalry is poised to intensify under a Trump administration. Escalating tariffs and trade restrictions may have adverse effects on certain sectors, particularly those dependent on imports from China, such as consumer electronics and textiles.
Trump’s policies may also impact European companies with significant U.S. exposure, especially in the automotive sector. German and European automakers, for instance, could face new import taxes, favouring American competitors like Ford and GM.
Defence spending is expected to remain robust under a Trump administration, especially with ongoing geopolitical uncertainties. U.S. defence companies may benefit from increased spending, while European counterparts could face competitive pressures in the U.S. market.
Key risks and uncertainties
Fiscal uncertainty and debt ceiling: The debt ceiling and federal budget remain crucial areas of risk. Budget negotiation could result in a government shutdown, increasing market volatility. If the debt ceiling suspension expires in January 2025, a swift resolution would be essential to avoid fiscal crises.
Trade disruptions and inflation: If Trump pursues high tariffs on imports, particularly from China, inflation could rise, forcing the Fed to adopt a hawkish stance. Elevated tariffs may also dampen consumer demand due to higher prices, affecting sectors such as retail and manufacturing.
Big tech regulations: Further restrictions on Big Tech could impact stock prices, especially in companies heavily reliant on advertising and social media. Although Trump’s relationship with tech leaders is complex, regulatory scrutiny on data privacy, market competition, and international partnerships may persist.
Conclusion
A second Trump term brings both opportunities and challenges for the U.S. economy and financial markets. Key areas of impact include fiscal policies, trade and tariffs, sectoral performance, and monetary policy. Investors may look towards cyclicals (financials, energy, etc.) and certain technology companies as potential beneficiaries, while tariffs and geopolitical tensions pose risks to specific sectors. Ultimately, Trump’s policies may foster a favourable environment for U.S. equities, especially if deregulation, domestic manufacturing, and tax policies create incentives for growth. However, headline risks—ranging from fiscal uncertainties to trade disruptions—could create periods of volatility, impacting both domestic and global markets.
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