Will Trump's "Liberation Day" Policies Spell Doom for the Stock Market?

The stock market is a fickle beast, and few events have the potential to roil it more than a presidential election. With Donald Trump's "Liberation Day" policies looming on the horizon, investors are left wondering: will these changes be a boon or a bust for the market? Let's dive into the data and explore the potential impacts on key economic indicators and the sectors most likely to be affected.



Economic Indicators: The Good, the Bad, and the Ugly

1. GDP Growth: Trump's policies, if enacted, could stimulate business activity and investment, leading to increased GDP growth. Historically, tax cuts have been associated with economic growth. For instance, the Tax Cuts and Jobs Act of 2017 was followed by a period of economic expansion and increased business investment.

2. Unemployment Rates: Deregulation and tax cuts could also lead to increased hiring, thereby reducing unemployment rates. The post-2017 tax cuts saw a period of low unemployment rates, with the unemployment rate dropping to historic lows of around 3.5% in 2019.

3. Inflation: Increased economic activity and higher demand for goods and services could lead to inflationary pressures. The period following the 2017 tax cuts saw a slight increase in inflation, with the Consumer Price Index (CPI) rising to around 2.5% in 2018.

4. Stock Market Impact: The stock market is sensitive to changes in economic indicators. Increased GDP growth and lower unemployment rates could boost investor confidence and lead to higher stock prices. However, inflationary pressures could lead to higher interest rates, which could negatively impact the stock market.



Sectors in the Crosshairs

1. Health Care: The health care sector is particularly sensitive to political risk. Healthcare stocks sold off sharply after Donald Trump’s election in 2024, driven by concerns that his alignment with Robert F. Kennedy Jr. on public health issues might pose challenges to the pharmaceutical industry.

2. Basic Materials: The basic materials sector is likely to be affected by changes in trade policies and government spending. The Morningstar US Basic Materials Index dropped 12.10% in the fourth quarter of 2024, finishing the year down 1.78%. This decline was attributed to factors such as weak demand and a continued recovery in supply.

3. Financials: The financials sector is likely to be affected by changes in tax regulations and government spending. Some segments of the financials sector benefited from rising interest rates, which allow banks to lend at higher rates and insurance companies to increase returns on collected policyholder premiums.

4. Energy: The energy sector is likely to be affected by changes in trade policies and government spending. Energy stocks are generally supported by relatively high oil prices, but earnings growth might struggle if oil prices continue to fall on the heels of both relatively weak demand and a continued recovery in supply.

The Bottom Line

President Trump's "Liberation Day" policies, if enacted, could lead to increased GDP growth and lower unemployment rates, which would likely have a positive impact on the stock market. However, the potential for inflationary pressures and higher interest rates could introduce volatility and uncertainty, affecting the stock market negatively. Investors should keep a close eye on these developments and be prepared to adjust their portfolios accordingly.