'MAGA 2.0' Is Here, But At What Cost?
AInvestWednesday, Nov 6, 2024 10:20 am ET
3min read
EYE --
GMUB --

As Trump has won the U.S. presidential election again and is preparing to return to the White House, whether people like it or not, the "Trump 2.0" era is well on its way. However, for investors, the comeback of this Make America Great Again (MAGA) agenda may have a high cost.

The Republican president is ready to introduce a new round of policies—increased tariffs, tax cuts, and immigration crackdowns—to stimulate economic growth and protect the U.S. from the influx of low-cost foreign goods and workers. Although Trump's first term also had similar policies and coincided with a surge in corporate profits, the implementation of these measures now could reignite the inflationary spiral, which would take years to quell after the outbreak of the pandemic.

The market is both optimistic and apprehensive about Trump's victory. Driven by Trump's pro-business agenda of deregulation and proactive industrial policies, U.S. stocks soared in early trading on Wednesday, with S&P 500 index futures rising by more than 2%. The fixed-income asset side presents a different picture, with the yield on the 10-year U.S. Treasury note surging to 4.5%, as the market anticipates that the expanding fiscal deficit under Trump's leadership will force the federal government to increase repayments on borrowings.

Higher yields could hit rate-sensitive stocks and challenge new financing efforts by corporate issuers and consumers, thus putting pressure on the rally in growth stocks. The stock market has been 35% above normal levels for a decade, and the risk premium for corporate bonds is at a historical low, significantly reducing the economy's margin for error.

Adam Crisafulli, founder of market intelligence firm Vital Knowledge, said, "Stocks have the wind at their back for now, but equities will be keeping a close eye on yields, and if the Treasury slump continues, that will short circuit the Trump equity celebration."

Additionally, the risk of protectionism is also increasing. According to J.P. Morgan, merely raising tariffs on Chinese imports to 60% could reduce the earnings per share of S&P 500 index companies by up to $15, a figure that could erase almost half of the revenue growth in 2025. Bloomberg estimates that if China takes retaliatory measures, the most extreme version of the tariff plan (a comprehensive rate of 20%) could reduce U.S. GDP by 0.8% and significantly increase price pressure in the coming years.

J.P. Morgan strategists, including Dubravko Lakos-Bujas, wrote in a report before the election results were announced, "A material increase in tariffs would represent the most significant departure in policy from the current administration and potentially the largest source of volatility. The current macro backdrop is much different versus eight years ago when the business cycle was in mid-cycle, the labor market was less tight, inflation was not on the Fed's radar, and pro-growth 1.0 policies were easier to implement and more impactful to the bottom-line."

However, the simple narrative may be overturned by the market, especially under Trump's leadership. Although his unstable relationship with the market was a constant factor in his first term—particularly breaking with convention on monetary and trade policies—risk assets have been exceptionally active, largely thanks to Trump's stimulatory fiscal stance.

As the U.S. economy is already growing at a healthy pace, inflation is currently subsiding, and the Federal Reserve is in a policy easing mode; this time, how the U.S. executive branch will push its fiscal agenda and affect the short-term bets on a soft landing is an open question.

Although the Republicans have won control of the Senate, the closely contested House of Representatives race is still ongoing, increasing the possibility that Trump's Democratic opponents may force the Republicans to soften their tax plans.

One thing is certain: during his first term, Trump loudly proclaimed stock market gains as a feat of his presidency, implying that he has a strong motive to keep the bull market going. However, at the same time, with the increased tax cuts to stimulate the stock market again, the valuation of the U.S. stock market reached the highest level on Election Day.

According to an estimate by Goldman Sachs strategists in September, Trump's promise to cut the federal corporate tax rate from 21% to 15% would increase the earnings of S&P 500 index companies by about 4%. But Seema Shah, Chief Global Strategist at Principal Asset Management, said that the rising borrowing costs due to the expanding budget deficit could offset the above benefits.

The Trump administration's attitude towards the Federal Reserve is another significant uncertainty factor for the market. Trump has repeatedly expressed skepticism about the Fed's policies and leadership. In an interview last month, he sidestepped the question of whether he would seek to replace Powell but said that it is reasonable for a president to inform the Fed chairman how he thinks interest rates should change.

Although the future of the market is unpredictable, it is undeniable that although Trump wanted to take credit for the bull market during his first term, the "America First" trade—long on U.S. stocks and the U.S. dollar relative to international assets—had momentum well before his election in 2016.

The "America First" era began after the 2008 financial crisis when the Fed switched to rescue mode, helping to sustain a long economic expansion. This prosperity continued during Biden's presidency, with U.S. tech giants leading the stay-at-home trade during pandemic lockdowns and the recent artificial intelligence boom.

In the view of Chris Grisanti, Chief Market Strategist at MAI Capital Management, Trump's victory would lead to greater deficits and inflation concerns, but as long as U.S. companies can sustain it, he will continue to take risks. He said, "I'll take higher rates, which are generally somewhat bad for the economy if they come with higher corporate earnings because the economy is stronger. Markets are reflecting the belief that animal spirits will be released by the Trump presidency."

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.