Here’s a streamlined analysis of Trump’s potential second term in office, examining his policy directions and their possible impacts on markets, both domestically and globally.

Summary of Trump’s Key Policies:

• Taxation: Trump aims to make the 2017 personal tax cuts permanent, cutting the corporate tax rate to 20%, with a preferential 15% rate for domestic profits. This tax policy may benefit corporations, especially domestically focused ones, though it could strain government revenue.

• Trade: A significant increase in protectionism is anticipated, with proposed tariffs ranging from 10-20% on all imports and up to 60% on Chinese imports. This move could raise the average U.S. tariff rate drastically, reminiscent of the economically disruptive 1930s rates, impacting global trade.

• Immigration: Trump plans to reduce immigration substantially and has hinted at mass deportations of undocumented individuals. This could reduce labor force growth, with potential negative effects on productivity and economic expansion.

• Federal Reserve: Trump might replace Fed Chair Jerome Powell and reduce the Fed’s independence, raising concerns about monetary policy stability.

• Climate and Energy: Likely rollback of net-zero commitments, coupled with support for fossil fuels and reduced green subsidies, may reorient the energy sector towards traditional industries.

• Regulation: Deregulation in energy and finance is expected, potentially boosting certain sectors but raising long-term risks.

• Budget Deficit: Trump’s policies could further increase the deficit, currently at 6.5% of GDP, adding another 2-3% of GDP to it.

Implications and Risks:

1. Fewer Checks and Balances: Trump’s second term might face less internal resistance, given reduced opposition from Republicans. While this could make policy implementation more efficient, it also increases the risk of unchecked decisions.

2. Trade Wars and Deglobalization: Expect heightened trade tensions, targeting major trade partners like China, Europe, and Japan. Tariffs may increase significantly, risking reciprocal actions from affected countries and causing market volatility, potentially worse than in 2018.

3. Policy Uncertainty: Trump’s unpredictable style could continue to create policy uncertainty, with his social media presence once again playing a significant role in market responses.

4. Increased Polarization and Social Tensions: Trump’s re-election may intensify domestic polarization, challenging bipartisan cooperation and risking social unrest.

5. Geopolitical Uncertainty: Trump’s foreign policy, including a possible negotiated end to the Ukraine conflict, might weaken NATO and embolden adversaries, creating broader geopolitical risks.

6. Investment Market Sequencing: If Trump initially prioritizes tax cuts and deregulation, markets might respond positively, mirroring the 2017 rally. Conversely, if tariffs and immigration cuts come first, market sentiment could turn negative.

Economic and Market Impacts:

• U.S. Growth and Inflation: While tax cuts and deregulation could boost productivity, higher tariffs and reduced labor force growth might elevate inflation and curb U.S. economic growth. Globally, these policies could further slow economic activity.

• Budget and Debt Concerns: A larger U.S. budget deficit, alongside high public debt levels (125% of GDP), could lead to rising bond yields, affecting borrowing costs and fiscal sustainability.

Investment Market Reactions:

• Bond Yields: Likely to rise due to a larger deficit, higher inflation, and reduced Fed independence.

• U.S. Dollar and Cryptocurrency: The dollar could strengthen, buoyed by higher tariffs and interest rates, with Bitcoin and other cryptos possibly benefiting from Trump’s crypto-friendly stance.

• U.S. Equities: Tax cuts and deregulation may support the market short-term, though tariffs and higher yields pose cyclical risks. Expect U.S. shares, especially financials and energy, to outperform relative to global markets, while clean energy stocks may struggle.

• Small Caps vs. Large Caps: Smaller, domestically focused companies may benefit from lower corporate taxes, while larger, international firms could face pressure from heightened trade tensions.

Impact on Australia:

Australia, highly reliant on global trade, could be vulnerable to new U.S.-China trade conflicts, especially if tariffs hurt demand for Chinese exports. This could dampen Australia’s GDP growth, negatively affect resource stocks, and potentially lower the Australian dollar. Additionally, Trump’s climate policy reversal could increase pressure on Australia to slow its own climate goals.

Final Thoughts:

Trump’s second term, while impactful, will likely be just one of many factors influencing markets. Investors should prioritize long-term strategies, maintaining diversified portfolios to weather policy-driven market shifts. As central banks continue to ease rates to manage inflation, equities may still find support, but volatility is expected amid heightened political and economic risks.

Watching closely, more to come.

Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)

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Note: Excerpts taken from Dr Shane Oliver’s (AMP) ‘Olivers Insights’.

Disclaimer
This document has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.