After a year of market anticipation, the second era of the Trump presidency will begin today (20 January) with the presidential inauguration.
Despite a year of analysis of what a second Trump term will mean for markets, the only market consensus seems to be that the future is unclear. Trump is a tricky test subject: the claims he made during his first campaign turned out to be more bargaining chips than promises, and a revolving door of cabinet members made for constant adjustments in policy. And a second set of questions come in how these policies will actually impact markets once put in motion.
This time around, Trump has kept to many of his favourite platitudes, including stricter immigration policies and a barrage of tariffs, but has also aligned himself with the tech world, specifically with the appointment of Elon Musk to head the new Department of Government Efficiency. He also faces an ongoing war in Ukraine that has shaped the European economy, which he claimed he would end before even taking the Oval Office. This promise has proved to be untrue.
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While Trump works as an erratic force in the Oval Office, markets found more stability in his selection for Treasury, investor and hedge fund manager Scott Bessent.
Russ Mould, investment director at AJ Bell, said: “Markets are eagerly awaiting Trump’s first batch of executive orders as this will provide clarity on the lay of the land. Immigration, energy and trade will be high up the list and, as always, the devil will be in the detail. Trump has had a lot to say on these issues but he also has a reputation of not always following what he’s promised to do to the letter.”
Tariff policies
Tariffs have been the centre of attention in the lead-up to Trump’s second presidency, as markets attempt to understand how literally to interpret his claims. Trump has claimed he will put in place tariffs between 10% and 20% for all imports to the US, and 60% to 100% for imports from China.
“Markets want to know which countries and industry sectors will be targeted and the relevant tariff rates to price in any risks or opportunities to equities, currencies and bonds around the world,” Mould said.
“Trump is likely to have a much greater influence on markets than Joe Biden due to his punchier policies and unpredictable nature. Investors should strap themselves in, as this situation implies much greater swings up and down for share prices, currencies and other asset classes.
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Patrick O’Donnell, senior investment strategist at Omnis Investments, said in addition to the obvious effects on China, policy could be particularly punchy for Europe.
“The initial emphasis is going to be on China but also on Europe. Recent sound bites from the administration are floating the idea of a middle ground between a broad-based tariff on everything and selective tariffs on Chinese manufactured goods. This is softer than what we heard on the campaign trail, but the precise details will matter for investments as we move through 2025.”
The US will not be immune to the tariff policies it puts in place, with many economists believing it will lead to a further increase in the price of goods for US consumers. But Cathie Wood, CEO of ARK Invest, sees an alternative if the tariffs are handled with care.
“Uncertainty during the transition could add to the wall of worry that has kept the markets on edge recently. Will tariffs trigger another bout with inflation? We think not: instead, those tariffs should be selective and incremental, their discrete effects ultimately displaced overwhelmingly by tax cuts, deregulation, and dollar appreciation,” Wood said.
“Indeed, we believe the market is likely to discount a successful Trump Administration, which could turn out to be one of the most successful administrations since the Reagan Revolution.”
The risk of inflation
One of the longer-term concerns that comes with Trump’s term is the inflationary nature of many of his policies. In addition to the possibility of higher prices due to tariffs, strict immigration policy could have an inflationary effect by driving up the cost of labour. The Federal Reserve has re-evaluated its easing plans for 2025 in light of the possible policies, and treasury yields sit at a 14-month high.
The economic impacts for the US will also become more clear as tax policy unfurls. But O’Donnell says much of this will come down to what can be passed in Congress, which is less unified than in Trump’s first term.
See also: Trump tariffs: A looming disaster for the global economy?
“An extension of the Trump 1.0 tax cuts is widely expected but the politics this time are much more difficult than in the first administration which may make it more difficult to pass further tax cuts. The majority in the House of Representatives is much thinner this time round and the members tend to be less disciplined than in the Senate,” O’Donnell said.
“Overall, uncertainty is likely to remain high over the next year and whilst we think the net impact of the new policy initiatives are likely to be well received by markets, the risks are elevated.”
If the policies are passed, Wood said the equity market could be put in a comfortable position.
“Trump Administration is likely to convince Congress not only to preserve the tax cuts scheduled to expire by year-end, but also to cut other business and individual tax rates and deregulate industries in which large corporations have armed lobbyists and benefitted from “regulatory capture” at the expense of small- to mid-sized companies,” Wood said.
“As a result, the bull market in equities is likely to broaden out from just a few cash-rich, large cap stocks to a broad swath of stocks that have been hampered by the supply shocks, the record-breaking burst in interest rates, and the rolling recession that have characterized the last four years.”
Is it time to make decisions?
The lead-up to inauguration day has been long, first with uncertainty of who would be president, and then with uncertainty of what that presidency would bring. But just because the day has arrived, not all believe it is time for major changes.
While much policy is squeezed into the first 100 days of presidency while momentum is high, another 1,361 days will still remain. And the advent of Trump is hardly the only influence on markets across the next four years.
“This economic cycle is relatively long in the tooth, there is a relatively structural large fiscal deficit, inflation risks are still present, economic activity outside of the US appears subdued with political issues in Europe. We expect markets to remain volatile, and not just because of social media posts from the oval office,” O’Donnell said.
Nina Stanojevic, senior investment specialist at St. James’s Place, also reminds that changes in political leaders have not necessarily been the bellwether for economic change in the past.
“With the presidential inauguration taking place today, we recognise the significance of this transition and its potential impact on the markets and economy,” Stanojevic.
“Despite the uncertainty surrounding the future direction of the new administration, investors should avoid making any immediate portfolio adjustments in response to this political development. Historically, markets have shown resilience across political transitions. Reacting to short-term political shifts introduces unnecessary risk and often undermines long-term returns. Investors should remain disciplined and avoid reactionary moves that could detract from sustained growth.”
This story was written by our sister title, Portfolio Adviser
