Arguably not since the return of Odysseus to Ithaca from the Trojan war in Homer’s "The Odyssey " has any political figure had to overcome as many trials and tribulations in seeking a return to the White House as Donald J Trump. But given the recent events in the United States the return of Donald Trump to the office of the President, barring any unforeseen eventuality now seems inevitable. Retail investors will need to strap-in for the ride if the sequel is anything like the original. Investors are keenly aware of how political uncertainty can influence financial markets. Trump's first term saw several instances where his pronouncements and policies had immediate and profound impacts on the dynamics of financial markets.
Trump’s unique communication style, particularly his use of social media to announce policy decisions, had immediate and sometimes anarchial impacts on market sentiment. Such unpredictability meant small retail investors had to stay awake until the early hours and be prepared for sudden market contortions. Or as Warren Buffet the CEO of Berkshire Hathaway sagely put it “Be fearful when others are greedy and greedy when others are fearful." Investors had to differentiate between short-term market fluctuations and long-term trends. Establishing a solid investment strategy with a focus on long-term objectives helped mitigate the whipsaw effect of the immediate market reaction to Trump’s late night tweets but even those guardrails were flimsy.
During his first tenure from 2017 to 2021, Trump developed the knack for moving markets with his utterances. One of the most striking examples of this was his approach to trade policy. Who could forget the market's rollercoaster when In December 2018 he abruptly announced he was slapping unprecedented tariffs on Chinese goods, the Dow Jones Industrial Average (DJIA) plummeted by over 770 points, only for him to recant himself in the afternoon of the same day and promise a beautiful trade deal — cue the relief rally.
Similarly, Trump's corporate tax cuts in 2017 led to a rally in the stock market, with the S&P 500 experiencing a significant uptick as businesses anticipated higher earnings. These historical instances illustrate Trump's proclivity to induce volatility and create opportunities for investors who can accurately predict and react to his administration's policy acrobatics.
During his first term, Trump used stock indexes as a barometer of both his successful economic policy and personal popularity. If he applied the same metric today then the record rise of the DJIA in the wake of the recent unsuccessful assassination attempt would be a clear signal that demonstrates the market’s bullish sentiment in anticipation of his second coming.
Trump's geopolitical stance will undoubtedly play a crucial role in shaping investor sentiment. During his first term his "America First" policies often led to scepticism among international allies and adversaries alike. A key area to watch is the ongoing Russia-Ukraine war. Trump's prior intransigence in respect to NATO and his promise to abruptly end the conflict may lead to unpredictable shifts in global alliances and defence policies. A perceived reduction in US support for Ukraine will unsettle European markets and energy supply chains. Furthermore, if Trump's policies disrupt international agreements or place new sanctions on key energy producers, energy prices could spike, creating global inflationary pressures. This would see energy sector stocks experiencing both positive and negative increased asymmetric volatility and a spillover effect into the capital markets and real economy. Investors might choose to respond to such dynamics by seeking safer investments, potentially driving up the prices of gold and government bonds while creating downward pressure on equities.
Another critical area of concern is the trend toward de-dollarization. During his presidency, Trump did not shy away from using economic sanctions as a tool of foreign policy, which has accelerated efforts by countries like China and Russia to reduce their reliance on the US dollar. Not forgetting somewhat confusingly Trump named China a currency manipulator in August 2019, even though the country did not meet the three criteria of the Trade Enforcement Act. Trump’s combative approach might intensify these efforts, affecting the dominance of the dollar in global trade.
However, the intervening four years since his first term have seen substantive change. The global economy has become more digital and multipolar, the dollar’s primacy is constantly under threat. This is compounded by a national debt in the region of $31 trillion dollars which requires urgent attention but has no simple solutions. The WSJ recently reported Trump’s intention to use stablecoins to alleviate the debt, but policymaking and regulation remain sketchy and a challenge, as do the implications and unintended consequences for the banking sector.
During his first term, Trump's tax cuts increased government spending contributing to the national debt's growth. The Tax Cuts and Jobs Act of 2017 reduced corporate tax rates significantly, providing a boost to corporate profits and thus, stock prices. Small investors owning stock in affected companies saw improved returns. Adjustments to individual tax rates and brackets also influenced personal disposable income and, by extension, investment capabilities and patterns. A second term might see similar fiscal policies aimed at stimulating economic growth but with potential long-term ramifications for the national debt.
A higher national debt will inevitably lead to increased interest rates as the government competes with the private sector for capital. This scenario would slow economic growth and increase borrowing costs for businesses and consumers. For investors, rising interest rates generally make bonds more attractive while putting pressure on stock valuations, particularly for high-growth tech stocks that rely on cheap borrowing.
Given the potential for increased market volatility, retail investors should consider diversification and risk management as key strategies. For retail investors, a weakened dollar will have mixed outcomes. On one hand, it would make US exports more competitive, benefiting companies with substantial international sales. On the other hand, it would lead to higher import prices and inflationary pressures, influencing the Federal Reserve’s monetary stance. Commodities, particularly gold and cryptocurrencies, often seen as hedges against currency depreciation, might provide an attractive safe haven in such a scenario.
Trump's preference for bilateral over multilateral trade agreements changed the landscape of international trade relations. In his first term the US Trade Representative Robert Lighthizer, under his tutelage conspired to neuter the World Trade Organisation (WTO) by wrecking its dispute settlement mechanism, rejecting multilateral negotiation processes, and applying unilateral protectionist measures. Increased US protectionism has undermined the WTO. It has eroded the principles of free trade, and encouraged retaliatory actions, thus diminishing the role of multilateral decision-making, and fostering selective compliance of international trade rules. This has led to a less stable, less predictable, and a far less fair global trade environment. Unilaterally tearing up the North America Free Trade Agreement (NAFTA) and imposing the United States-Mexico-Canada Agreement (USMCA), is an example of the Trump playbook. Trump's decision to abolish NAFTA and impose a new treaty is part of his broader agenda to prioritise America's economic interests and reduce trade deficits.
Faced with the prospect of unbridled volatility retail investors would be wise to adopt strategies that emphasize diversification, risk management, and vigilance. And perhaps heeding the advice of the legendary George Soros who said when making investment decisions, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
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