President Trump’s Return & the Markets: What You Need to Know

Now that the ballots are in and Republican Party candidate Donald Trump is set to become the next President of the United States, you may be wondering what his proposed policies could mean for the markets. Let's take a closer look at a few key areas that stand to shift in response to the change in power in Washington:

Trade & Tariffs

Trump's tariff policies, a hallmark of his previous administration, are likely to resurface as he aims to revitalize domestic manufacturing. Proposals include expanding tariffs on Chinese imports and potentially broadening these to other nations. Such measures could yield mixed results for U.S. equity markets. On one hand, protectionist policies might benefit domestic manufacturing and agriculture stocks, as local industries gain some insulation from foreign competition. Indices heavily weighted in these sectors, like the Dow Jones, could see gains from these protective measures.

On the other hand, additional tariffs could strain international relations, reducing export volumes and affecting companies with significant overseas revenue streams. Technology and consumer goods sectors, especially companies reliant on global supply chains, could face higher input costs and decreased profit margins, impacting the NASDAQ and consumer-focused indices. The market's reaction will also hinge on how foreign trading partners respond, as retaliatory tariffs or restrictions could offset the intended benefits for U.S. industries.

Market strategists warn that prolonged trade tensions may amplify market volatility, especially if geopolitical uncertainties escalate. As with past protectionist policies, sectors reliant on global trade may see adverse effects on their stock prices. Trump's return to office, paired with tariff expansions, could turn out to be a double-edged sword: while encouraging local industry growth, it may challenge sectors tied to international trade, making equity indices potentially volatile under these conditions. (Source: US Bank)

Equity Indices

Following Donald Trump's election victory, markets are anticipating shifts that could influence equity indices. Trump's focus on reducing corporate tax rates and increasing U.S.-based manufacturing tax incentives signals potential impacts across sectors. His proposal to cut corporate tax rates, with a further reduction for U.S.-manufactured goods, is expected to boost domestic production and potentially drive stock gains in sectors like manufacturing, technology, and energy. This may result in favorable performance across U.S.-based companies and industries highly dependent on domestic manufacturing, likely giving indices such as the S&P 500 and Dow Jones a positive boost.

However, there are concerns about rising budget deficits stemming from these tax cuts. While the market often reacts favorably to pro-business policies, significant federal deficit increases could introduce volatility, particularly in bond markets. Should the federal deficit balloon due to lower tax revenues, there could be indirect pressure on stock indices as investors weigh the risks of federal debt levels. Additionally, Trump's suggested rollback of environmental and renewable energy incentives could redirect investment away from green sectors, dampening equity performance in those areas.

Historical trends indicate that markets may experience short-term gains under business-friendly administrations. Yet, investors remain cautious about potential interest rate hikes, which could offset gains if the deficit leads to inflationary pressures. The overarching expectation is for Trump's policies to initially lift equity indices due to increased business profitability but possibly introduce longer-term volatility tied to fiscal sustainability. (Source: US Bank)

Energy Policy

President-Elect Donald Trump's impending return to office could bring major shifts in U.S. energy markets. Before the election, Trump pledged to cut energy costs for Americans in half within his first year by rapidly increasing domestic oil and gas production. At a September 2024 event in New York City, he went so far as to energy policy as central to controlling inflation: "Energy is going to bring us back." Trump plans to expand drilling and ease restrictions on power plant construction, aiming to drive gas prices "below $2 a gallon" through what he called a "national emergency declaration."

While presidents don't directly control oil production, Trump's policy emphasis on boosting domestic energy could impact inflation, especially through lower fuel costs, which directly affect the agriculture sector. Some experts note that cheaper energy could reduce food production costs and help curb inflation, given fuel's role in agricultural expenses. However, there can be heard voices of caution regarding the potential environmental impacts of increased fossil fuel reliance as well. (Source: Time)

Interest Rates & the Fed

With Donald Trump having secured the presidency, the Federal Reserve could face mounting pressure to shift its established stance on interest rates in the very near future. Trump has previously criticized the Fed's rate hikes, especially during his 2016-2020 term, and he may push for more aggressive cuts to stimulate economic growth. Given the lingering public concerns over high prices, his administration might leverage influence - albeit indirectly - on the Fed to keep rates low, promoting business investment and consumer spending.

However, this shift could place the Federal Reserve in a delicate position. The institution is mandated to act independently, balancing economic growth with inflation control. If Trump's policies prioritize rapid growth, the Fed might face increased scrutiny for any resistance to lowering rates, creating potential friction between the central bank and the administration.

Furthermore, with inflationary pressures still echoing, lowering rates prematurely could risk reigniting inflation, a scenario the Fed may seek to avoid. Trump's presidency might thus shape a complex and contentious economic landscape, where the Federal Reserve's independence and its approach to monetary policy could be significantly tested as it navigates between the new administration's goals and macroeconomic stability. (Source: Brookings)

Crypto

In the wake of Donald Trump's victory in the 2024 U.S. presidential election, cryptocurrency markets, according to some experts, could be in for a bumpy ride. Given Trump's previous stance on cryptocurrencies - which ranged from skepticism to open criticism - there is anticipation about potential regulatory changes or enforcement policies that could shape the market. Some investors may fear an uptick in regulations, which could lead to temporary sell-offs, especially if Trump prioritizes stricter oversight of digital assets or heightens scrutiny over decentralized finance.

However, others may view Trump's return as an opportunity for a pro-business administration that could encourage innovation in financial technologies. Supporters argue that Trump's policies may foster a favorable tax climate or new policies that allow blockchain startups and crypto companies to flourish in the U.S. market. This potential for regulatory contrast creates a unique tension, driving fluctuations in crypto valuations. In the short term, market volatility is likely, with prices rising or falling sharply as the Trump administration clarifies its stance. Long-term impacts will hinge on the specific regulatory actions and fiscal policies introduced over the coming four years. (Source: Forbes)

Forex

The forex market could also face potential shifts once Trump's policy portfolio becomes clearer, and this is the case especially for USD currency pairs. Trump has pledged to raise tariffs on Chinese imports to 60% or higher, which could place pressure on foreign economies, potentially leading officials abroad to either devalue their currencies or raise tariffs on U.S. exports in response. This may result in inflationary pressures in the U.S., spurring a rise in interest rates.

Newly expansionary fiscal policies, such as increased spending and a lower tax burden, would likely strengthen the U.S. dollar, fueled by expectations of robust economic growth and higher interest rates. Currency pairs such as USD/CNY, USD/EUR, and USD/JPY might experience notable movements, with potential USD appreciation against the yuan and euro as foreign economies navigate responses to U.S. policy shifts and dollar strength. (Source: FXStreet)

Conclusion

In conclusion, Donald Trump's return to the presidency introduces a dynamic period for markets, shaped by potential shifts in trade, energy, fiscal, and regulatory policies. While these changes could stimulate domestic industries and economic growth, they may also spark volatility and uncertainty, especially in globally connected sectors and sensitive markets like crypto and forex. Traders in any arena, from traditional stock trading to futures, may wish to continue to monitor developments as they come.

Past performance is not indicative of future results. Information provided is intended for informational purposes only and is obtained from sources believed to be reliable.