Donald Trump’s U.S. election victory, where he secured the popular vote by a narrow margin of 1.7%, marked a significant shift in political dynamics. His campaign drew increased support from low-income voters, various racial groups, women, and younger demographics. With Republicans now controlling Congress, his return to power has surprised many—particularly in Australia, where support for him consistently trailed that of his opponent, Harris.
Trump’s detractors—48.3% of voters who backed Harris—view his presidency as a threat to critical issues such as the environment, diversity, equity, and inclusion (DEI), economic inequality, democracy, the rule of law, global peace, and fiscal stability. Concerns center on the likelihood of larger budget deficits, inflation, and trade wars. The diminished institutional checks this term, coupled with his inability to run for reelection and a team of staunch MAGA loyalists, add to the apprehension of a rapid policy rollout.
On matters like the environment and DEI, critics argue that the majority of American voters prioritized economic concerns over these issues. However, this preference for the "hip-pocket nerve" during periods of economic hardship is not new. Across the U.S., Australia, and other nations, rising living costs and stagnant real wages over the past four years have been pressing challenges that continue to dominate public sentiment.
Setting environmental and social concerns aside, Trump’s supporters view his presidency as a potential catalyst for reinvigorating the United States and fostering global peace. As is often the case, the truth likely lies somewhere in between, but the road ahead could be turbulent. In the immediate aftermath of the election, we assessed the implications of Trump’s victory, focusing on its impact on investment markets and Australia’s economic outlook.
This analysis delves into the key differences between Trump’s current presidency and his initial term in 2017, as well as the constraints that may shape his ability to implement his agenda…
The Market Reaction: A More Nuanced Response
Trump’s proposed policies signal a continuation of his earlier agenda, including extending the 2017 personal tax cuts, reducing corporate taxes, imposing a 10–20% general tariff and a 60% tariff on China, slashing immigration, deregulating bureaucracy, potentially diminishing the Federal Reserve’s independence, and reversing Biden-era climate policies.
The market’s response to his victory has been increasingly nuanced, reflecting both optimism and apprehension:
U.S. Bond Yields: Yields have risen by 0.8% since mid-September, fueled by concerns that Trump’s policies may trigger higher inflation, larger budget deficits, and elevated Federal Reserve interest rates.
U.S. Dollar Strength: The dollar has surged to its highest level in over a year, reflecting investor confidence in its resilience amid economic policy shifts.
Cryptocurrency Surge: Bitcoin and other cryptocurrencies have seen sharp gains, with Bitcoin breaking its downtrend since March. Speculation that Trump will champion cryptocurrencies, bolstered by Elon Musk’s appointment to co-lead the "Department of Government Efficiency (DOGE)," has fueled optimism in the crypto space.
Global Shares Under Pressure: U.S. shares have reversed 50% of their post-election rally, while non-U.S. shares have underperformed due to fears that higher U.S. tariffs could dampen global trade. However, Australian shares have bucked the trend, reaching record highs.
The varied reactions suggest that markets are cautiously weighing the potential impacts of Trump’s policies, reflecting both opportunities and risks.
Key Differences Compared to 2016…
Reflecting on the Trump 1.0 era from 2017–2020, many describe the economic performance as relatively stable, barring the disruptive impact of COVID-19. During this period, U.S. shares posted gains in three out of four years, averaging an impressive 17% annually. However, the global landscape was more peaceful and less economically strained compared to today. The current economic and financial environment poses significantly greater challenges.
Higher Inflation: In 2017, underlying inflation hovered around 2%, with long-term expectations at 2.5%. Today, both metrics sit closer to 3%, with inflation psychology less firmly anchored following the inflationary surge of the past four years.
Lower Unemployment: The unemployment rate was approximately 5% in early 2017, compared to just above 4% today, signaling a tighter labor market.
Worsened Budget Deficit: The U.S. budget deficit has risen from 3% of GDP in 2017 to roughly 7% today, with gross federal debt climbing from 105% to 125% of GDP.
Higher Bond Yields: In 2016, the U.S. 10-year bond yield was 1.8%, reflecting a period of disinflation. Today, it has surged to 4.4%, driven by higher inflation, elevated Federal Reserve interest rates, and a growing deficit. Similarly, Australian 10-year bond yields have risen from 2.4% in 2016 to 4.6%.
More Expensive Shares: In 2016, U.S. shares traded at 17.2 times price-to-earnings ratios based on 12-month forward earnings, following a market correction in 2015–16. Today, they trade at 23.7 times, reflecting significant growth during Trump’s first term and Biden’s presidency. From 2017–2020, shares under Trump rose strongly, averaging annual gains of 17%, while under Biden they averaged 16% annually over the past four years.
Shrinking Risk Premium: In 2016, the earnings yield (based on 12-month forward earnings expectations) provided a 3% premium over the 10-year bond yield. Today, that premium has turned slightly negative, diminishing the attractiveness of U.S. equities compared to bonds. While Australian shares still offer a positive risk premium, the Eurozone’s valuation remains more appealing than U.S. equities.
A More Challenging Environment
Taken together, these factors create a more difficult economic and investment environment than in 2016, when Trump first came to power. The constrained potential for upside in equity markets is likely to impose limits on Trump’s policy ambitions, potentially moderating his most extreme measures.
Constraints on Trump…
Although Trump faces fewer constraints than during his first term (2017–2020), several significant factors could still temper his more extreme populist policies. These constraints include:
Bond Vigilantes: The combination of higher bond yields and mounting public debt increases the likelihood of a bond market panic if the deficit outlook worsens. In 2017, debt interest expenses on U.S. government debt accounted for about 6% of federal spending; today, they are approaching 10.5%, a level worse than Italy’s. A sharp rise in yields could hinder U.S. economic growth—already pressured by a fragile housing market—and trigger political pressure on the Trump administration to scale back tax cuts, akin to the market-driven pushback faced by the UK’s brief Truss government.
The Share Market: Trump views the stock market as a critical measure of his success and is likely to prioritize its performance. This was evident in 2018 when a near-bear market slump of 19.8%—driven in part by trade war concerns—prompted him to negotiate the Phase One trade deal with China. While he may tolerate some market weakness, sustained declines exceeding 20% could lead to a strategic pivot to stabilize equities.
Conservative Republicans and the Mid-Terms: The Republican Party’s narrow House majority means even a few budget-focused members could push Trump to moderate his fiscal policies. This constraint may intensify as the 2026 mid-term elections approach, especially if backlash against his policies—stemming from reduced federal services, tariff-driven inflation, larger deficits, or higher interest rates—damages Republican prospects.
Mandated Spending: Elon Musk’s claim that federal spending could be slashed by $2 trillion faces significant hurdles. With the total federal budget at $6.75 trillion, and roughly two-thirds allocated to defense, social security, and healthcare, such cuts would be politically challenging. This leaves only $2.25 trillion for discretionary spending adjustments, limiting the scope for substantial reductions.
Trump’s Mandate: While Trump campaigned successfully on improving the cost of living and controlling immigration, these priorities may not align with policies like steep tariff hikes, which could exacerbate living costs through higher prices. Surveys consistently show that concerns about globalization and trade rank low among voter priorities, making widespread support for aggressive tariffs unlikely.
Concluding Remarks
These constraints may ultimately steer Trump’s administration toward supply-side reforms reminiscent of Reagan’s presidency, rather than populist policies dominated by protectionism and tariffs. This shift could benefit investment markets in the long term. However, the path forward may be bumpy, with potential market turbulence akin to the 2018 share market slump—or worse—before policy adjustments are made.
While today’s investment environment is less favorable than in 2017, the outlook may not be as dire as some fear. Global shares, despite constrained prospects, could still deliver moderate returns, offering a silver lining amid the challenges.
Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial
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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.