The re-election of Donald Trump as President of the United States has led to months of global speculation about how his second term will shape the world economy, geopolitics, and financial markets. In his inaugural address – which was to say the least, extraordinary – he emphasized national sovereignty, the superiority of the US, and economic growth. According to the 47th (and 45th) president, a golden era is dawning for his country, with the Panama Canal returning to US control and the Gulf of Mexico being renamed the Gulf of America.
Trump's usual bravado was on full display yesterday, but words – especially in politics – do not always translate into actions. How seriously should we take Trump's words, and – just as importantly – what does it mean that he did not mention certain words?
In last week's Global Political Analysis, I identified the seven most important areas for the markets – tariffs, tax policy, deregulation, immigration, the independence of the Federal Reserve, government finances, and geopolitics – where Trump and the new Congress can make an impact in the coming years. The first three issues were extensively covered in last week's report, and next week I will delve deeper into the last four. But to what extent do yesterday's events provide any clarity about what is to come?
(1) Tariffs and Trade Wars
Trump's protectionist rhetoric from his inaugural address suggests a continuation of his previous policy, focusing on protecting American industry. However, it remained a vague announcement of tariffs and his new pet project, an External Revenue Service. The latter sounds impressive but is mainly a way to show his base that Trump is serious about his trade policy without leading to concrete measures against other countries. For now, the situation is not as dire as it seemed in the run-up to the inauguration.
(2) Tax Policy
A key pillar of Trump's economic policy is lowering taxes. He has previously proposed making the 2017 tax cuts permanent and introducing additional measures primarily aimed at small and medium-sized businesses. This policy can provide a short-term boost to consumption and business investment but significantly increase the budget deficit.
In yesterday's speech, taxes were not mentioned. Probably because Trump knows very well that he can do little in this area without Congress. Although the Republicans have a majority in both chambers, the margin is very small, especially in the House of Representatives, and it is also not significant in the Senate. Moreover, there is a faction within the GOP that is very concerned about the heavy debt burden of the US government. In short, it will be a tough task to realize Trump's tax wishes, and he clearly does not want to burn his fingers on it yet.
(3) Deregulation
In this area, Trump can do significantly more without needing Congress. He promised significant changes yesterday, especially in the energy sector. He pledged to remove bureaucratic obstacles that limit oil and gas production. According to Wood Mackenzie, this could increase fossil fuel exports by 20% by 2028.
In the deregulation area, it was also notable that Trump launched a frontal attack on ESG rules and, more broadly, on the so-called woke culture. In Trump's words: “I will also end the government policy of trying to socially engineer race and gender into every aspect of public and private life.” This does not directly affect the markets, but it does make clear how divided American society is, even in socio-cultural terms.
(4) Immigration
Immigration was central to Trump's inaugural address. He promised mass deportations and strengthened border controls. These policy measures can have significant consequences for sectors that rely on foreign labor, such as agriculture, technology, and hospitality.
Stricter immigration measures are likely to lead to higher labor costs and labor shortages. This may force companies to invest in automation and more efficient processes to remain competitive. At the same time, restrictions on highly skilled immigrants can slow down innovation and technological progress.
Incidentally, I suspect that Trump will mainly want to score points on TV and Instagram in this area; in the sense that he wants to show his voters that he is serious with media-friendly deportation actions (as already announced in Chicago) and some initial hard, eye-catching measures (such as immediately stopping the app that allowed migrants to make an appointment at border crossings to enter the country legally). But ultimately, the impact on the number of migrants entering America will probably not be very significant. Also because people like Elon Musk – the unofficial First Buddy – find a listening ear with Trump, and companies like Musk have no interest in much stricter immigration policies.
(5) Independence of the Federal Reserve
Trump's relationship with the Federal Reserve remains a concern, even though he did not mention the central bank in his speech. Trump has previously criticized the Fed's interest rate hikes and seems willing to pressure the institution to pursue an expansionary monetary policy. This can undermine the Fed's credibility and destabilize markets.
If the Fed is eventually forced to lower interest rates, this can be beneficial for stock markets in the short term, but it will also increase inflation risks, weaken the US dollar, and undermine overall confidence in the US economy.
However, Trump can do little against the Fed in practice. The members are appointed for fourteen years and can only be dismissed in very exceptional circumstances. If Trump wants to change the rules, he can only do so with Congress's approval, and that seems very unlikely.
(6) Government Finances
The combination of tax cuts, higher infrastructure and defense spending, and economic stimulus measures likely to be implemented under Trump will probably lead to a significant increase in US national debt. Fitch Ratings predicts that the budget deficit could rise to 10% of GDP by 2026. That Trump did not mention government finances is not surprising: he has never been concerned about government deficits and debts. Trump also wanted Congress to suspend the debt ceiling for several years – so that he would have free rein to spend – but Congress did not agree.
Rising debt levels will undoubtedly put upward pressure on interest rates in the long term and lower the US's creditworthiness. This will also increase the cost of capital for both companies and consumers.
(7) Geopolitics
Trump's inaugural address emphasized the need for an assertive American geopolitical position, but at the same time, he reiterated his aversion to American involvement in wars. In any case, Trump's unilateral approach will likely lead to more economic fragmentation and tensions with allies. In any case, all alarm bells must have gone off in Panama City.
Golden Era or Gray Times?
Trump's second term promises an era of significant changes, characterized by protectionism, tax cuts, deregulation, a brake on the energy transition, and an assertive geopolitical course. For companies and asset managers, it is crucial to closely monitor these trends and develop strategies that both mitigate risks and seize opportunities. Asset managers may benefit from sectors such as technology, infrastructure, and defense, while CFOs should prepare for challenges such as higher labor costs and financing risks. Hopefully, our Global Political Analysis reports can provide the necessary guidance.
