Donald Trump’s return to the White House has major implications for people’s money, says Dan Coatsworth, investment analyst at AJ Bell.
Whether it’s investments in the stock market, government bonds, cash in the bank and even holiday money, Donald Trump’s stated policies have far-reaching consequences.
Trump’s election victory has already had an impact on stocks, bonds and currencies and we’re likely to see further action once he is inaugurated on 20 January.
The US stock market initially responded favourably to the election result last November but recent headwinds have curtailed some of the Trump-related gains. The S&P 500 index of US shares is now trading 1.2% higher than election day, while the more tech-focused Nasdaq index is up 3.7%.
Initial euphoria was driven by investors locking onto the fact Trump is pro-business and is expected to cut taxes and have looser regulation, potentially giving a boost to corporate profit margins and driving greater share buybacks. There is a big risk that investors have now priced in a lot of potential good news and that markets don’t do as well once Trump is back in power.
How have markets performed under previous Republican presidents?
Analysis by AJ Bell of market performance during previous campaigns since 1949 finds that US equities can be slow movers in the first year of a Republican president, rising just 2% on average.
The second and third years are much better, rising by 11.8% and 14.8% on average respectively, with only a 0.2% gain in year four.
How have bond markets reacted?
The bond market appears to be less optimistic, given how Treasury prices have fallen amid concerns that Trump will borrow more money, putting further pressure on the government’s finances. The US budget deficit is expected to have been $1.9 trillion in 2024, an already sky-high figure, so the prospect of it getting even bigger is a worry.
Bond yields rise when prices fall and the 10-year US Treasury yield now stands at 4.791% compared to 4.286% on the day of the 2024 US presidential election. That’s quite a jump in such a short period and provides a headwind for the equity market as it influences the cost of borrowing.
Rising bond yields create headwinds for equities because they increase companies’ cost of raising capital. They affect swap rates, which are estimates of future interest rates and are what financial institutions pay to acquire funding for lending. If the cost for lenders goes up, the rates they charge to customers will also increase.
Also starting to weigh on investors’ minds is the fact that Trump’s policies could drive up inflation, particularly around immigration and tariffs. A clampdown on immigration could lead to higher labour costs if the pool of individuals willing to do certain jobs shrinks.
Tariffs: the big unknown
Tariffs are the big unknown with regards to Trump. We still don’t have precise detail on which sectors and countries will be targeted and the rates imposed. A week ago, investors were hoping Trump’s bark could be worse than his bite, with market chatter that the incoming US president’s tariffs might only be applied to critical imports. Such a move would be positive not just for global trade but also for the US economy as it could dilute prospects for inflation to rear its ugly head.
However, Trump quickly appeared to throw cold water over this suggestion. The latest speculation is that Trump’s economic team might consider a ramp-up in trade tariffs rather than going straight in guns a-blazing. Markets would like such an approach as it gives companies on the receiving end of tariffs more time to consider their options, and it could also mean a slower increase in inflation.
Obvious winners trading higher
Investors could have made good money through investing in the obvious ‘Trump trades’ ahead of his inauguration. Nearly all of the obvious winners from his policies are trading higher since the election was called.