We’re a month into President Trump’s second term and there’s 47 more to go, which means investors need to make peace with a less predictable market backdrop.
While sitting on the sidelines for the next four years is one strategy, it’s unlikely to be a very good one.
The S&P 500 increased 58 per cent during Trump’s first term despite plenty of twists and turns, and there’s every chance you’ll be rewarded for keeping your cool this time around too.
Tariffs and trade tensions have dominated the headlines since Inauguration Day, but markets have taken these in stride.
I think Trump will prove more measured and adaptable than some believe on this front, rather than completely destabilising the global economy.
The president has a lot of power when it comes to trade policy, and he could’ve imposed harsh, across-the-board tariffs right off the bat on day one.
Instead, he’s been targeted, selective and flexible.
The US is the world’s biggest economy by some margin, and consumption accounts for two thirds of it.
That means the US consumer is the as big as the entire Chinese economy, so Trump has significant bargaining power with the rest of the world.
Tariffs are a tool by which he can apply pressure to others, forcing their hand to achieve a particular outcome for the US.
He’ll take advantage of this privileged position, but he is a businessman and a dealmaker at heart.
We’ll see unreasonable demands, threats and brinksmanship, then eleventh hour negotiations before the “world’s greatest deal” is announced.
Get used to that approach.
The most important issue for the typical American is still the cost of living, and we’ve just seen the inflation rate push back up to three per cent again for the first time since June last year.
A little less growth wouldn’t do the US any harm, as it might give the Federal Reserve more breathing space to reduce interest rates.
However, tariffs are inflationary and ongoing concerns over a potential resurgence in cost pressures might limit how far Trump can push it.
While our attention is tuned in to trade policy, we shouldn’t take our eyes off bond yields.
This could be a much more relevant story for investors, and one with more riding on it.
The 10-year Treasury yield hit 4.8 per cent last month.
That’s more than 100 basis points higher than when the Fed first cut rates back in September, while it’s not far from the 16-year high of five per cent it briefly touched in 2023.
It’s slipped back more recently but is still hovering around the 4.5 per cent level.
While central banks are in control of short-term interest rates, longer-term ones reflect market expectations for growth and inflation.
The potential for a growing deficit and more bond issuance is also driving bond yields higher, given Trump’s fiscal plans and his desire for extensive tax cuts.
The 10-year bond yield has a big impact on investor sentiment but more importantly, it drives the price of fixed rate mortgages in the US.
Americans do not want tax cuts if that’s going to mean higher mortgage payments and auto loan rates.
Many of Trump’s Republican colleagues realise this, and there is growing opposition to anything beyond extending the 2017 tax cuts (which are due to expire at the end of this year).
If we see enough pushback from Congress here, bond yields might well have peaked.
That would be a good thing from the perspective of equity and bonds markets alike.
It might also mean that the US dollar, which has been very strong on the back of tariff worries and an increasingly cautious Fed, is also close to a top.
Financial markets can still perform well against this backdrop, even with Trump in office and the uncertainty he brings.
The US economy is in good shape, while earnings growth has been tracking higher than expected.
It could be wise to lean against the prevailing theme of US exceptionalism too, just a little.
It’ll be a bumpier ride, that’s for sure, but if the tariffs prove moderate, growth slows and bond yields slip, we might still be in for a rewarding period.
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Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.