With a second Trump term at least partially reflected in the
price of global markets, we focus on two key debates for the
longer-term: Potential tariffs and fiscal policy.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan
Stanley’s Global Head of Fixed Income and Thematic
Research. Today on the podcast – some initial thoughts on
the market implications of a second term for President Trump.
It’s Wednesday, Nov 6, at 2pm in New York.
As it became clearer on election night that Former President
Trump was set to win a second term in the White House, markets
began to price in the expected impacts of resulting public policy
choices. The US dollar rallied, which makes sense when you
consider that President Trump has argued for higher tariffs,
something that could hurt rest of world growth more than the
US.
US Treasuries sold off and yield rose, something that makes sense
given President Trump supports tax policy choices that could
meaningfully expand deficits. And US equity markets rallied
led by key sectors that could benefit fundamentally from extended
tax breaks and deregulation, including industrials and
energy.
But with a second Trump term now at least partially reflected in
the price of markets across assets, it gets harder from here to
understand how markets move. There’s several key debates
we’ll be tracking, here’s two that are top of mind.
First, how will tariffs be implemented? Per the work of our
economists, higher tariffs can raise inflation and crimp
growth. They estimated that a blanket 10 per cent tariffs
and 60 per cent tariffs on China imports would raise inflation by
1 per cent and dampen GDP growth by 1.4 per cent. Some pretty big
numbers that would really challenge the soft-landing narrative
and positive backdrop for equities and other riskier
assets. Other approaches may carry the same risks, but to a
lesser degree. Tariffs exercised via executive authority
would, in our view, likely have to be targeted to countries and
products – as opposed to implemented on a blanket basis. So, the
approach to tariffs could represent a substantial difference in
the outlook for markets.
Second, how quickly and to what degree might US deficits
expand? Our presumption has been that fiscal policy action,
regardless of US election outcome, wouldn’t become clear until
late 2025, largely governed by the need to address several
provisions from the Tax Cuts and Jobs Act that expire at the end
of that year. But, while not our base case it's of course
possible that a Republican Congressional majority could deliver
on tax cuts earlier – and perhaps even in larger size. The
resolution to this debate could make the difference between
yields climbing even higher than they have recently and taking a
pause at these levels.
Bottom line, as the election ends and the Presidential transition
begins, there’s a lot about policy implementation that we can
learn to guide our market strategy. We’ll be paying
attention to all the key policymaker statements and
deliberations, and feed through the signal to you.
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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