Stephen Dover: Trump day 1–Implications for investors

Yesterday, Donald Trump was inaugurated as the 47th president of the United States. As expected, his inauguration speech and a raft of executive orders gave investors a day-one glimpse into the policies his administration will pursue.

In what follows, we summarize what we learned about the key objectives and policies of the second Trump Administration and conclude with implications for investors.

Summary

To state our primary conclusion at the outset, although much of what Donald Trump emphasized on his first day in office was expected, a great deal remains uncertain, including on tariffs, tax cuts, deregulation, budget deficit reduction and monetary policy (which includes the administration’s relations with the Federal Reserve [Fed] as well as the Trump administration’s approach to cryptocurrencies).

Accordingly, investors are apt to remain cautious as they consider the outlook for US growth, inflation, interest rates, the dollar and other fundamentals that drive asset prices. In short, on his first day in office, Trump simultaneously clarified and obfuscated, leaving considerable room for uncertainty about his aims and his prospects for achieving them.

Key announcements

Among Trump’s key announcements made in his inauguration speech, subsequent remarks, and first-day executive orders were:

• An immediate closure of the southern US border, backed by a declaration of a border emergency.
• Planned deportations of undocumented immigrants.
• The establishment of an “External Revenue Office,” albeit without any specificity nor announcement of new tariffs.
• The potential for 25% tariffs on goods from Mexico and Canada, to be determined by February
• A focus on countries engaged in currency manipulation but without explicit mention of countervailing measures.
• The reversal of recent Biden executive orders prohibiting oil and gas exploration, as well as the intent to expand US fossil fuel production.
• The intent to increase US energy exports.
• The elimination of tax credits for electric vehicles (which requires legislation).

Biggest surprises

Alongside closure of the southern border, the biggest surprise was the “non-announcement” of tariffs against China, Mexico or other countries. Also surprising were other items that President Trump omitted from his statements or actions, including:

• No mention of an extension of the expiring provisions of the 2017 Trump tax cuts, nor of any other tax changes.
• No explicit measures to further deregulate the business or financial sectors.
• No explicit comments on cryptocurrency regulation, adoption, or use.
• Apart from a broad reference to DOGE (Department of Government Efficiency), no specific measures aimed at federal budget deficit reduction, entitlement reform, elimination or extension of the debt ceiling, or other broad fiscal aims.
• No mention of anti-trust policy.
• No mention of monetary policy.

Implications for the economy, markets and investors

What then are the initial implications for the economy, financial markets and investors?

Based on the intra-day volatility of currency markets and equity futures on January 20, the initial market response has been mixed, but punctuated with a sense of relief regarding tariffs.

The omission of specific new tariffs in Trump’s inauguration speech initially weakened the dollar and boosted equity markets. Subsequently, Trump’s informal remark about imposing 25% tariffs on Mexico and Canada in February led to market reversals. By the start of US trading on January 21, however, the general sense was that tariff fears had not been realized, and the markets started on an upbeat note.

Fundamentally, Trump’s day-one policy announcements in sum act as a short-term constraint on supply (above all labor supply via immigration, as well as potentially on goods supply via tariffs), without significant reductions in total demand (e.g., via tighter fiscal policy). Moreover, to the extent that the business sector anticipates tax and regulatory relief, “animal-spirits” will likely boost business outlays for capital equipment, information technology and workers, potentially stoking an economy that is already at full employment.

Accordingly, the economic implications for early 2025 appear to pro-growth and (moderately) inflationary. Increased business spending without a commensurate fiscal policy offset will lift total demand, while supply constraints arrive via restrictions on immigration and tariffs (when they are announced).

Hence, the recent cautious tone the Fed has struck (as expressed in the minutes of its December 2024 policy deliberations) will likely continue. The implication is that short- and long-term interest rates will remain elevated for the foreseeable future. That outcome should also support a strong US dollar in global foreign exchange markets.

So it seems as though equity markets will therefore not enjoy the benefit of expectations for significant Fed easing (rate cuts). Given prevailing high stock market valuations, the near-term outlook for equities therefore hinges on corporate profits results now arriving in the fourth-quarter earnings season, as well as from any tangible policy announcements regarding deregulation or tax cuts. The latter, however, requires Congressional legislation.  Given a very narrow Republican majority in the House of Representatives, tax uncertainty will linger for longer.

The key near-term challenge for global equity, bond and currency markets is tariffs, which would almost certainly be followed by countervailing measures from other countries. Given Trump’s long history of advocating for tariffs (including his praise for President McKinley, noted in history as a staunch tariff proponent), it remains highly probable that new tariffs will be announced and that trade frictions will escalate.

On the positive side, probable steps in deregulation and lower taxes should lift expectations for US long-term productivity growth. More investment should flow into the oil and gas sector via exploration and production spending, as well as in expansion of US energy export capabilities. To the extent that the Trump Administration relaxes anti-trust litigation, uncertainty for large capitalization information technology companies will be lifted. Lighter-touch regulation will also benefit financial services.

Conclusion

In sum and as expected, the first day of the second Trump Administration got off to a powerful start. Immigration was confirmed as a top priority, as was support for the fossil fuel energy sector.

But several important policies were not clarified, above all on tariffs, taxation and government spending. While we expect details and clarification in those areas over the days and weeks to come, those “known-unknowns” have the potential to act as a brake on investor enthusiasm until they are clarified.

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