As Donald Trump prepares to assume the presidency for a second term, markets are grappling with uncertainty and volatility, driven by the potential impacts of his economic agenda. The new administration's plans for tax cuts, trade policies, and deregulation are expected to shape U.S. and global markets, but investors are 'jittery' about the potential outcomes.



Tax Cuts and Deregulation: A Double-Edged Sword

Trump's proposed tax cuts and deregulation could have significant implications for corporate earnings and stock performance. The Tax Cuts and Jobs Act (TCJA) of 2017, which slashed the corporate tax rate from 35% to 21%, led to increased corporate profits and boosted stock prices. If Trump extends these tax cuts, it could further enhance corporate earnings and stock performance. However, any significant changes to tax policy will require the approval of Congress, and the balance between revenues and expenditures will likely play a central role in negotiations.

Deregulation can reduce compliance costs for businesses, enhancing profitability. In the energy sector, deregulation could lead to increased production and lower energy prices, benefiting energy companies and their shareholders. In the financial services sector, deregulation could boost the banking sector and enhance merger-and-acquisition activity, driving stock performance. However, deregulation may also create policy risks for certain sectors, such as clean energy and electric vehicles.

Trade Policies: Tariffs and Market Volatility

Trump's trade policies, particularly tariffs, have the potential to significantly impact U.S. and global markets. His protectionist stance, including tariffs and renegotiated trade agreements, poses risks to global supply chains and sectors reliant on international trade. Increased production costs and retaliatory tariffs could weigh on corporate earnings in agriculture and aerospace, triggering market volatility. Companies with significant international exposure may see stock price fluctuations, further exacerbating investor uncertainty.

Trump's proposed tariffs on Chinese goods, such as a 60% tariff, could raise inflation and weigh on U.S. economic growth. According to Bloomberg Economics, these measures could cause inflation to increase by 2.5% and GDP to decline by 0.5% in the two years following imposition. Tariffs could have varying impacts on different sectors, with technology and automotive sectors potentially being negatively affected, while energy and manufacturing sectors might benefit from reduced competition and increased domestic production.



Immigration Policy: Labor Markets and Economic Growth

Immigration policy changes under Trump could influence labor markets and economic growth. The Trump administration is expected to move quickly on immigration policy, with the president-elect promising a mass deportation of undocumented immigrants. If implemented on a large scale, this could represent a major labor supply shock, potentially reversing the 2023 growth tailwind from the labor supply and risking a wage-price spiral.

However, the base case scenario projects around 300,000 to 500,000 deportations annually, representing 0.2% to 0.3% of the U.S. labor force. This marginal tightening of labor markets could potentially drive wage growth specifically in low-skilled sectors and industries heavily reliant on immigrant labor, such as agriculture and construction. The impact on GDP growth is expected to be marginal, with productivity gains and/or deregulation elsewhere acting as offsets. However, if curbs on immigration are greater or faster than the base case scenario, the drag on growth – and hence earnings – may increase.

In terms of market impact, the base case scenario envisions a broadly neutral effect on equity markets, mildly supportive for investment grade credit, and modestly negative for government bonds due to the perceived risk of wage pressure.

Navigating Uncertainty: Investor Perspectives

Investors are grappling with uncertainty and volatility as Trump's economic agenda unfolds. While some sectors may benefit from tax cuts and deregulation, others could face increased risks from trade policies and immigration changes. As markets await clarity on the administration's plans, investors are advised to stay focused on their long-term investment strategies and financial goals, while remaining vigilant to the potential impacts of Trump's economic agenda on their portfolios.

In conclusion, markets are 'jittery' about Trump's economic agenda, as investors weigh the potential benefits and risks of his proposed policies. As the new administration takes office, investors will be closely monitoring the developments and their impact on U.S. and global markets.