With the inauguration of President-elect Donald Trump
approaching, our Global Head of Fixed Income and Public Policy
Research weighs the impact for investors of his potential policy
measures.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income and Public Policy Research.
Today on the podcast I'll be talking about what investors need to
know about recent US policy developments.
It’s Wednesday, Jan 8th, at 2:30pm in New York.
In less than two weeks, Donald Trump will again become the
sitting President of the United States. The economic and market
consequences of the policies he might enact, either on his own or
in concert with the Congress, continue to be an important debate
for investors. Our view has been that the sequencing and severity
of policy choices across tariffs, taxes, immigration, and
regulation would be very meaningful to the market's
outlook.
So, have we learned anything from news around the policy
discussions inside the incoming administration and congressional
leaders? Let’s consider it here and level set.
First, there‘s been news about Republicans debating their
approach to legislating some of President Trump’s top policy
priorities. That debate centers around whether to create one big
bill around taxes, immigration, and a host of other issues or to
break it into multiple bills. Leading with immigration reforms,
where there may be more consensus within Republicans’ slim
Congressional majority; and then following it up with tax cuts
and extensions, which may take more time to negotiate given
myriad interests. While investors have asked us about this debate
quite a bit, the distinction between the approaches may not make
much of a difference to investors.
At the end of the day, what should matter most to markets is the
timing and size of the fiscal impact driven by tax changes. Going
with one big bill may seem faster, but we’re reminded of the
saying ‘Nothing is agreed until everything is agreed.’ In other
words, that one big bill would probably only pass as fast as
Republicans could agree on its toughest negotiating points – so
likely not very soon.
As for the size of fiscal impact, we continue to see consensus
around extending most of the tax cuts that expire at the end of
2025, with some new benefits, like a domestic manufacturing tax
credit. So, there should be some fiscal expansion in 2026, a few
hundred billion dollars in our view; but this is meaningfully
different than the trillions of dollars that the media cites when
discussing the whole of the tax policy wish list.
There’s also been some news on the approach to tariffs, but again
it seems more noise than signal. Recent media reports are that
Trump might adopt a tariff plan focused on specific products as
opposed to a blanket approach on all imports. Trump denied the
report via social media. But even if he hadn’t, it's unclear that
such a plan could be executed quickly through existing executive
powers or through legislation, where it's far from clear that
tariffs could be enacted given Democrats' opposition and
procedural barriers from budget reconciliation. So, our view
remains that new tariffs will likely be enacted but through
executive authority – which means a phased-in focus on China and
Europe in 2025; and any new authorities developed via existing
laws might not be enactable until 2026. So said more simply, the
impact of tariffs on the economy may be a late 2025 into 2026
story.
Putting it together for investors: So far, the news flow hasn’t
materially changed our view on the US policy path. Yes, important
policy changes are coming, but their implementation may be slow.
That should mean that, to start 2025, the healthy fundamentals of
the US economy should help drive risk markets, namely U.S.
equities and corporate credit, to outperform. If we’re wrong and,
for example, tariffs are implemented in larger magnitude at a
quicker pace, then it may be a year where less risky assets, like
government bonds, outperform.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague today.
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