Global Multi Asset Thought of the Week

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December 09, 2024

Will Trump 2.0 Be as Good for the Markets as Trump 1.0?

December 09, 2024

Will Trump 2.0 Be as Good for the Markets as Trump 1.0?

Global Multi Asset Thought of the Week

Will Trump 2.0 Be as Good for the Markets as Trump 1.0?

December 09, 2024

Bottom Line

Markets are bullish on Trump’s second term, hoping for tax cuts and better growth. We expect no net stimulus and a decent size hit from tariffs and immigration. This should be bullish for bonds as the Fed continues cutting, but could be a disappointment for frothy stocks.

U.S. assets surged on Trump’s election, reflecting expectations for a repeat of his growth- and markets-bullish first term. Since early October as the odds of a Trump victory rose, U.S. stocks outperformed non-U.S. stocks by nearly 12%, the 10-year Treasury yield has popped +66 basis points (bps) and the U.S. Dollar (USD) rose +5.9%. Market optimism is based on the assumption that a boost from deficit spending (tax cuts) and deregulation will outweigh any drag on growth from tariffs and curtailed immigration.

Political analysts doubt a wider deficit can pass through a Republican house with such a slim majority. While it is true that Trump’s first term policies (e.g. tax cuts) were positive for growth and markets, a repeat is unlikely in the current political environment. We conclude the policy mix likely to be enacted will be growth-negative, resulting in a -60 bps hit to U.S. growth (-70 bps to global growth) and a one-time +80 bps increase to U.S. inflation for the following reasons:

No net tax cuts: Fiscal spending and additional tax cuts will likely disappoint, given that Congress will have to focus on the already-heavy lift of extending the 2017 Tax Cuts and Jobs Act (TCJA) at a cost of $4.7 trillion over 10 years, and that new unfunded tax cuts or additional spending will be politically difficult under a Republican House able to lose only 3-4 votes. Of the two dozen fiscally-minded House Republicans, at least a few are likely to stand in the way of additional tax cuts, given they are currently aiming to halve the cost of the extending the TCJA.
Even modest tariffs to hit growth: The most likely outcome is a 20% increase in tariffs on Chinese imports and on Mexico/EU autos, with a smaller probability of more aggressive tariffs. Our probability-weighted estimate suggests a hit to U.S. growth of -75 bps. Assuming tariff revenues are recycled as fiscal spending, the net hit to U.S. growth from tariffs will be -40 bps. The equivalent net hit to global growth from tariffs will be -70 bps, with China the worst hit (-80 bps).¹
20 bps drag from curtailing immigration: Under tougher asylum rules and border policies, immigration could fall from over 3.3 million in 2023 to 0.7 million per year.²
Minimal near-term growth impact from deregulation: While deregulation will be positive in the near-term for certain sectors (e.g. financials, energy), and positive in the long-term, it is unlikely to significantly impact the overall economy in the next 12 months.

We would expect the Fed to continue to ease closer to a neutral rate of 3-3.5% by the end of 2025, as they look through the one-time price level adjustment of tariffs and focus on the weaker growth impact of the policies above. For markets, weaker growth, temporarily higher inflation and continued Fed easing will be supportive for bonds, especially with no major fiscal easing (beyond the 2017 Trump tax cuts extension), but could undermine expensive and overbought stocks.

Bottom-line: Markets are bullish on Trump’s second term, hoping for tax cuts and better growth. We expect no net stimulus and a decent size hit from tariffs and immigration. This should be bullish for bonds as the Fed continues cutting, but could be a disappointment for frothy stocks.

DISPLAY 1

Existing Deficits too Wide for Additional Stimulus (Assuming Trump Tax Cuts Extended)

Source: GMA team, FactSet, Haver. As of Nov 25, 2024. Government debt as a percent of GDP is gross government debt as a percent of GDP. Index performance is for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

DISPLAY 2

Total Tariffs To Rise From 2.5% to 9% in a Moderate Tariff Scenario

Source: GMA team, FactSet, Haver. As of Nov 25, 2024. Index performance is for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

DISPLAY 3

Modest Drag From Net Immigration Collapse From 3.3m Per Year to Sub-1m

Source: GMA team, FactSet, Haver. As of Nov 25, 2024. Past performance is no guarantee of future results. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

¹ We estimate that the hit to global growth from tariffs alone would be -90 bps (-110 bps for China). But the net impact, including some positive offsets from a mix of looser fiscal policy, lower rates and weaker FX from non-US countries, would be -70 bps (-80 bps for China).
² CBO and Brookings Institute estimates.

Cyril Moulle-Berteaux

Head of Global Multi-Asset Team

Global Multi-Asset Team

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