DECEMBER 2024
Donald Trump’s return to the White House on 20th January 2025 is already making waves in markets, much like it did after his 2016 victory.
Back then his surprise win sparked a big dollar rally with the trade-weighted DXY index surging by 6% in the month after Election Day (red circle).
A similar trend is underway this time around with his “America First” policies of tariffs, tax cuts and deregulation amplifying the dollar’s recent advance; the DXY is up 7% since late September (red box).
As we’ve noted before, a strong dollar tends to spell bad news for other markets as it sucks liquidity out of the financial system, making it harder for risk assets to gain traction.
However, all is not lost.
Look how the dollar peaked just as Trump officially took office in January 2017. It then went on to lose 14% during the first 12 months of his tenure (red arrow) as markets acknowledged some of his more extreme policies were being watered down.
History could well repeat with the dollar likely to retrace some of its recent gains as Trump’s second term gets underway.
This would be consistent with the President’s desire for a weaker dollar and our wider view that liquidity conditions will need to remain supportive next year as Central Banks help Governments refinance their debt burdens.
Keep a close eye on US bond yields.
The “Trump Pump” has seen risk assets, like equities and crypto, surge since his convincing election victory last month, but his economic policies could lead to much higher bond yields.
Borrowing costs surged during the first half of his inaugural term, albeit from a low base. The 10yr Treasury yield rose from 1.5% in late 2016 to a cycle-high just above 3% in November 2018 (red box).
It then fell sharply as tighter financial conditions destabilised the economy and markets, culminating in the 10yr yield hitting a record low 0.5% as the pandemic emerged in 2020.
Bond yields are starting at much higher levels this time around, limiting their upside given that the indebted global economy has never been so rate sensitive.
So a “buy the rumour, sell the news” pattern would be consistent with both the US dollar and bond yields heading lower in early 2025.
But if yields do continue their ascent, either because nominal GDP or inflation are picking up, brace yourself for a tougher investment climate next year.
Higher borrowing costs usually put a brake on equity prices, albeit with a lag.
Strip out times of crisis and the US fiscal deficit has seldom been so large. It clocked in at almost 7% of GDP in Q3 2024.
Team Trump clearly has its sights on reversing this trend.
Treasury Secretary-elect, Scott Bessent, is a renowned fiscal hawk and is targeting a halving of the deficit by 2028.
To achieve this, he will lean heavily on the new Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy. This high profile pair intend to slash U$2trn from the Federal Budget in short order.
At face value, anything that reduces the US (and global) economy’s reliance on debt and government intervention is a good thing.
But it will be nigh on impossible to implement these sort of budget savings without triggering a major economic and market downturn.
Which begs the question, will President Trump continue to support his three fiscal musketeers should his opinion ratings dive as a recession takes hold?
We suspect not, suggesting the era of “fiscal dominance” has a lot further to run.
Many political commentators argue that Donald Trump views the performance of the US stock market as the ultimate opinion poll.
Hence why he claims his first term was such a roaring success; the S&P 500 index almost doubled over the 4 year period, despite the intervening Covid-led plunge (red box).
Simply put, his comeback appears bullish for equity investors. Over the next 4 years Trump will likely do whatever it takes to drive the market higher.
And, at face value, his pro-growth policies of tax cuts and deregulation speak to both higher nominal GDP growth and stronger corporate profits. We view the latter as essential if the 2-year bull market is to endure.
However, the stock market begins his second term at much higher valuation multiples compared to the first, suggesting a lot of good news is already priced in. And, as noted elsewhere, his return could drive bond yields higher, which often causes equity prices to weaken.
On balance, the prevailing bullish trend should stay intact well into next year, albeit with a few bumps and bruises along the way. But there are some issues on the horizon that suggest Trump may not have it all his own way.
The content of this document is for information purposes only. The authors believe that, at the time of publication the views expressed and opinions given are correct. No guarantee in performance of investment can be given to readers intending to take action based upon the content of this document. It is reminded that this document is a matter of opinion and any person wanting to invest in this market should first consult with the professional who can advise on their financial affairs. Any such investment will see your capital at risk, and you may get back less than you invest. Any companies cited in this report are used to support the view of the authors and should not be construed as recommendations to purchase or sell the underlying securities. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility of any direct or indirect or consequential loss suffered by a reader or any related person as a result of any action taken, or not taken in reliance upon the content of this document.
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