What will a Trump presidency do for markets?

It turned out the pollsters were wrong. President Donald Trump got back into office with a majority of the popular vote, winning the closely contested states that dominated commentary and campaign events. Republicans polled 51%, five million more votes than the Democrats.

Kamala Harris was thrown back on the eastern and western seaboards of the US where enough voters in the large cities of New York and California stayed loyal to Democrats and provided the bedrock of her support. In Washington DC itself Democrats scored an impressive 93% to Trump’s 6%.

President Trump and his supporters will see this as more evidence that US government is tilted against them. It will intensify his resolve to cut the bureaucracy and change the personnel that govern the US from the capital. The new political map of the US is an internal ocean of Republican red, with blue Democrat corridors along the two coasts. Democrats currently live mainly in the large eastern and western cities. The Great Lakes areas that Democrats thought they could win let them down.

This election was a revolt of rural and small-town America against the Washington establishment. They disliked the inflation and squeeze on real incomes delivered during the first part of the Biden Presidency. They disliked the large numbers of illegal migrants allowed across the border. They felt that Washington did not listen to their needs.

They did not like the foreign wars, with the US expected to pay and support allies without being able to control the outcomes. The Democrats mainly campaigned on the past conduct and wilder statements of Mr Trump, only to find many voters had decided to put up with that. Their overriding interest was in change. They want President Trump to put them first and to do more to allow them to raise their living standards.

What is the likely early agenda?

What will a Trump Presidency do for markets?. We should expect an early attack on the size and leadership of the Washington bureaucracy.

He wishes to introduce more senior people recruited to follow his agenda and wants to reduce regulation. Elon Musk wishes to head a new smaller government initiative claiming he could save as much as $2 trillion. The Department of Education is pencilled in for abolition, though President Trump may end up slimming it and changing some personnel.

He will arrest, reverse or amend much of the green transition architecture of subsidies, targets and bans. The new government will want to licence many more oil and gas exploration and development wells. President Trump sees cheaper energy as central to industrial investment at home. He also sees it is a useful source of extra tax revenue which generates plenty of well-paid jobs. He will be happy to export more. His policy is a remix of the old “drill baby, drill” policy of the Sarah Palin era and earlier.

He will want to extend the life of his previous tax cuts beyond 2025 when they otherwise expire. He wishes to cut income tax and has pledged to remove income tax from tips. He has even speculated on removing income tax altogether, but there is no worked-out plan and that would imply very high tariffs, which he sees as an alternative revenue stream. He wishes to cut corporation tax on domestic production.

Foreign policy

President Trump made much of the Middle Eastern and European wars on Joe Biden’s watch. He blamed Biden for negotiating with Iran, letting that country sell more oil and press on with its armament programme. Trump had constructed alliances between Saudi Arabia, the United Arab Emirates, Egypt and Israel, to isolate Iran.

He was using tough sanctions to cut its revenues from oil. He will probably seek to rebuild these alliances whilst encouraging Israel to end its current military actions. There is no easy fix. He felt President Biden had sent wrong signals to Russia ahead of the invasion, and then followed a policy of helping Ukraine enough to prolong the war but not enough to win it. He has stated he wants to pressurise both sides to reach a settlement.

He will continue to press NATO allies to spend more on defence and will expect the Europeans to take more responsibility for Ukraine. He will be looking for expenditure savings on help for Ukraine.

He will threaten a variety of countries with higher tariffs as part of efforts to get them to change their behaviours. He has pledged a 10% general tariff on imports, and a much higher tariff on China. He thinks countries like France and Brazil are also difficult to deal with over trade.

He will regard China as a serious competitor who he thinks trades unfairly. He plans higher tariffs for the country’s goods and will continue the bipartisan policy of restricting Chinese access to US technology.

It will take time for the new administration to make its appointments and set out its new smaller structure of government. World leaders will be keen to be in touch. They will seek clarification of what the US will be doing on tariffs, and on the Middle Eastern and European wars. President Trump usually threatens more than he enacts, seeking a deal that gives him a win and settling when the threat has achieved something. There will be more tariffs, but they are unlikely to be as high as headlines suggest and there is likely to be a world response to him to seek to meet him part way on what he is trying to achieve.

Some say Trump economics will mean lower growth and higher inflation. Whilst it is true higher tariffs put up consumer prices of imports, there will also be a planned increase in US domestic supplies and more cheap energy. The administration will aim to lower the costs of running government and the public sector.

The Fed’s policy over the last year does not suggest an early surge in prices. Growth is slowing ahead of the new President taking over, with a reduction in the pace of new job offerings. The aim of Trump policy will be to speed growth, which could also be assisted by interest rate cuts to come. US business could benefit from lower taxes and from a continuing ‘America First’ policy.

There are fears in the bond market of too much extra borrowing to sustain tax cuts, though the market has managed to fund the money for the substantial deficits run by the outgoing administration. The market will need to adjust not only to tax cuts, assuming Republicans can pass the legislation, but also to any success President Trump might have with reducing the size and cost of government.

He will wish to achieve more by tariffs and less by subsidies to spare the deficit. The US deficit is likely to stay high, but bond markets are likely to continue to finance it. The Fed may well slow the reductions to its own balance sheet holdings of bonds, removing a negative pressure.