Trump raises the risk of boom and bust
Cutting taxes and red tape could boost the US economy in the near term. But the threat of inflation remains, and Trump’s plans could exacerbate it. Markets may not respond well to another round of big price rises.
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As well as the Paris Olympics, 2024 will be remembered for its elections. The US, the UK, India and Mexico were just some of the countries that chose new leaders or representatives during the year. There were surprises, but voting was not significantly disrupted by violence, AI “deepfakes” or foreign interference. Whatever your view of the results, that is something to be celebrated.
2024 was also a good year for the global economy. Global output looks likely to have expanded by around 2.7%, roughly the same as in 2023. Activity in the US was slightly stronger than the previous year, despite mid-year fears of a slowdown, helping offset more sluggish growth in Europe and China. There has also been good news on inflation, which continued to fall towards the 2% target set by the Federal Reserve and many other central banks. In the US, prices were rising at 2.6% as of mid-October, compared to 3.1% a year earlier. This has allowed central banks to cut interest rates, at a time when growth is still healthy.
This strong fundamental backdrop resulted in another impressive year for global equities. The MSCI All Countries World Index rose 19% to the end of November, with just over 80% of the return generated by American stocks. In the first half of the year, the US market was led by the “Magnificent 7” tech companies1 but performance has been broadening out more recently.
While the election of Donald Trump will change many things, his protectionist agenda could mean that the US economy and market continue to outperform. But this is a period of huge uncertainty. We don’t know what trump will do, how other countries will respond, or the impact of policy shifts within those markets. Some are preparing for a more challenging environment. Chinese authorities, have unveiled a range of measures to boost the domestic economy, while Germany is set to hold elections early next year that could result in more decisive leadership. In France and South Korea, by contrast, political instability comes at a difficult time.
Global equity market returns driven by the US
Breakdown of returns for MSCI All Countries World Index (2024 to November, in GBP terms)
Source: Cazenove Capital, Bloomberg. Data in GBP terms to November 2024.
What does Trump mean for the US?
We expect that Trump’s tax cuts and deregulation will result in higher US growth and inflation. Schroders’ economists now expect US output to expand by 2.5% in 2025, up from 2.1% previously, with inflation of 2.4%, again up from 2.1%.
This view is being reflected in financial markets. US stocks rose following the election, as stronger growth should boost American corporate profits. We have also seen a stronger US dollar and a fall in US treasuries, in anticipation of a slower pace of interest rate cuts. The performance of international stock markets has generally been weaker.
Optimism about the US economy could continue for a while yet, suggesting that a “risk on” stance remains appropriate. Stronger US growth could also lead to a broadening of market performance, as investors shift their focus from the largest tech companies to medium-sized and smaller companies that are more dependent on US economic performance.
Unfortunately, Trump’s plans also come with considerable risk. An overheating economy is the most immediate concern. US inflation is still above 2%. A big demand boost could cause it to rise again, potentially prompting the Federal Reserve to change course and raise interest rates.
Then there are Trump’s more dramatic campaign pledges, including mass deportation of undocumented immigrants, tariffs of 10 to 20% across the board and of 60% for Chinese imports. These measures could be incredibly disruptive. How will businesses cope with sudden shortages of staff or components? It’s possible we see prices rise as they did after the last big “supply side” disruptions – the pandemic and the invasion of Ukraine. For now, however, markets appear to be assuming that Trump will again fail to fully deliver on his campaign pledges.
Trump barely delivered half of his 2016 campaign pledges
Source: Schroders, Politifact 21 November 2024
Political and economic constraints
Republican control of the Senate and House of Representatives means there are few legislative constraints on Trump. Some of his cabinet picks also suggest that he is serious about pursuing a disruptive agenda. In practice, though, Trump won’t have an entirely free hand. His political success stems from his appeal with many disparate groups: Wall Street and Main Street, libertarians and conservatives. Keeping all of them happy will be hard.
Even the Republican party may balk at some of Trump’s policy proposals as their implications become clearer. To take just one example, Trump’s opposition to clean energy initiatives (the “new green scam”). Schroders’ research suggests that over half of spending on renewable energy projects in the past two years has been in Republican leaning states and districts. Representatives may not be keen on legislation that cuts funding for projects creating jobs and opportunities.
Trump’s biggest constraint could turn out to be economics. Even though inflation peaked two years before the US election, it seems that many voters could not forgive the Democrats for the rise in prices under their watch. Trump may not be too concerned about inflation, given he cannot be re-elected. But the rest of the Republican party will be.
What does Trump mean for China – and the rest of the world?
Global growth in the 2020s has been slightly below the average of the 2010s. Besides a pandemic and war, the main reason for this has been China, which has been hobbled by a property market slump, weak consumer confidence and deflation. Needless to say, a big reduction in external demand – as a result of US tariffs – would not be helpful. Exports still account for around 20% of China’s GDP. The prospect of a more challenging trade environment is very likely one factor behind China’s recent steps to boost domestic demand.
Very high US tariffs on China would likely be felt far beyond its shores. Redirecting exports to markets outside the US, and substituting US imports, would have mixed consequences for countries in Europe, Asia and Latin America. Currency and bond markets could become more volatile as trade and capital flows are realigned.
The retreat of globalisation
“Deglobalisation” is one of the four “Ds” that have shaped much of our thinking about markets for the past few years (the others being demographics, decarbonisation and disruption). Trump’s second term could well accelerate what is already an established trend. No one could claim that the past four years have been peaceful, and Trump could even deliver an uneasy truce in Ukraine. A more isolationist America, however, along with more friction in international trade, is unlikely to create a more stable global backdrop.
Trump has always been known for his impulsiveness: late night tirades on social media, frequent hiring and firing and policy U-turns were all features of his first term. We are expecting more of the same in his second term, along with higher levels of market volatility. We will respond as we always do in uncertain times: by staying focused on the long term, maintaining an appropriate level of diversification and actively managing portfolios as the outlook evolves. We are well prepared for the challenge.
1 Magnificent 7 = Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla.
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Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.
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