Trump 2.0 – New regime, same rhetoric.

For investment markets the US election was always likely to be the biggest event of the year. It seemed close throughout the campaigns, but in the end Donald J Trump won a clean sweep of both sides of the US political system. The day before the result one US pollster declared that the most likely outcome was Trump by a big margin, and second most likely, Harris by a big margin… such is the divergence of the US electorate these days.

President Trump is now just the second man in history to serve non-consecutive terms as US president. His first, between 2017 and 2021, was a pretty positive one for markets. His tax cuts and general pro-business policy stance was welcomed, supported by what was also, up until Covid, a positive economic backdrop. Between his first election victory and the end of his term the S&P 500 (US equity market) rallied around 60%.

Today markets have reacted expecting more of the same. His campaign was battled on the basis of a similar stance – maintaining the tax cuts, raising tariffs, deportation, and a hard stance on China. Investors expect that to benefit domestic economic growth, at the expense of others, with the US market and US dollar, standout performers since the result was announced.

Although that has benefited our portfolios in the short term, we are cautious about the longevity of the reaction. We don’t doubt that Trump 2.0 will be more pro-business than the alternative, though the backdrop is different this time:

The main thing that stands out here is the starting point for inflation, interest rates and government debt, which are all a lot higher than they were when he first inherited power in 2016. This makes it significantly more challenging for this Trump administration to spend and increase tariffs without risking higher inflation and even higher government borrowing costs. We’ve had our own great example of that in the UK just recently following Rachel Reeves first budget, with UK borrowing costs and mortgages spiking in the aftermath. These consequences can often override the benefits of the policy in the first place. Saying you will do good things for the US economy can be useful rhetoric, though if the fundamentals are not supportive, there is a real chance of some unpleasant and unintended consequences.

The other key factor on a lot of people’s minds is what this all means for the Russia-Ukraine war. President Trump has famously said he will “solve the war in 24 hours”, suggesting that by 21^st January, the day after his inauguration, a peace deal will be done. If achieved this would likely be another positive market factor, removing some of the geopolitical uncertainty that’s been in place since 2022. The questions remain; what does he need to offer to achieve a peace deal and what is the impact not only on Ukraine, but the wider US relationship with the EU?

Then finally there are tariffs, which were a staple of the first Trump term. There is little doubt that tariffs in some form will return, though it is worth remembering that before Trump came into office we were just at the end of a period of significant globalisation. It was really the change in rhetoric (e.g. “trade wars”) that got markets worried at that time. Investors have had 8 years to get used to US-China tensions amongst others, so more tariffs are likely to be seen as more of the same this time, rather than a new regime. We expect much of his rhetoric on tariffs will have few consequences in the UK economy, assuming the new political administration in the UK are accommodating to maintain good trading relations with our key trading partner.

What does all that mean then? Well, we do have Trump 2.0, and so far US equity markets seem to like it and US (and UK) bond markets don’t. They both expect more spending, higher economic growth and more chance of inflation. We do expect economic data to remain slow, and the Trump impact from policy change will take some time to come through into economic data – maybe 2 years or so. Our sense is that given the market reaction thus far, government bonds look very attractive, and if we get what we expect, which is more of a  ‘dumbed down’ version of Trump’s rhetoric, then this might well provide a positive opportunity for our portfolios.