BY WEALTH ADVISER
Introduction and Market Context
The global financial landscape stands at a pivotal moment following Donald Trump’s return to the White House. His victory, secured with a 1.7% margin in the popular vote and notably expanded support across demographic groups, has triggered significant market reactions and raised important questions about the future of global investments. This electoral outcome reflects a clear prioritization of economic concerns over other issues among American voters, with cost of living emerging as the dominant factor in voting decisions.
The immediate market response to Trump’s victory has been notably more nuanced than during his first election. U.S. bond yields have experienced an 0.8% increase since mid-September, partly driven by concerns about potential inflationary pressures and expanding budget deficits. The U.S. dollar has surged to its highest level in more than a year, while cryptocurrency markets have shown remarkable strength, particularly evident in Bitcoin’s break from its March downtrend.
The global equity market response has been mixed, with U.S. shares demonstrating initial volatility and nonU.S. markets showing relative underperformance due to concerns about potential trade restrictions. This market behaviour suggests a more complex and mature investor response compared to 2016, reflecting both learned experiences from Trump’s first term and the significantly different economic environment of 2024.
Key Policy Shifts and Economic Implications
The proposed policy framework under Trump’s second administration presents several significant shifts that could reshape the global investment landscape. At the forefront is his trade policy, with proposed tariffs of up to 60% on Chinese imports and 20% on goods from other countries. As Cameron Mitchell of ANZ notes, these policies emerge in an era of increasing convergence between geopolitics and business, where corporate decisions increasingly reflect political realities rather than purely economic considerations.
The fiscal landscape presents particular challenges. Unlike 2017, when Trump first took office, the current economic environment features:
• Higher underlying inflation (3% versus 2% in 2017)
• A tighter labour market with unemployment at 4% compared to 5% previously
• A significantly larger budget deficit at 7% of GDP versus 3% in 2017
• Bond yields at 4.4% compared to 1.8% in 2016
These baseline conditions suggest that implementing aggressive fiscal policies could face greater market constraints than during Trump’s first term. The ‘UNTIDI’ framework, highlighted in the market analysis, provides a useful structure for understanding the broader implications:
• Uneven energy transition: Creating potential opportunities in both traditional and renewable energy sectors
• New trading patterns: Suggesting a shift toward onshoring and regional trade blocks
• Trusted technologies: Indicating a deepening technology divide between the U.S. and China
• Industrial policy: Reflecting increased government intervention in key sectors
• Defence: Pointing to increased global demand for defense capabilities
• Ideology: Suggesting more ideologically driven foreign policy decisions
Market Constraints and Balancing Forces
The implementation of Trump’s policy agenda faces several significant constraints that may moderate its more extreme elements. These constraints present important considerations for investors developing long-term strategies. The first and perhaps most powerful constraint comes from what Dr. Shane Oliver terms “the bond vigilantes.” With U.S. government debt interest expenses now pushing 10.5% of spending (compared to 6% in 2017), the bond market’s reaction to expansionary fiscal policies could be severe. As noted in the analysis, “A further sharp rise in yields would threaten US economic growth (with the housing market already back under pressure) and lead to intense political pressure on the Trump Administration to curtail the tax cuts.”
The stock market itself represents another significant constraining force. Historical evidence from Trump’s first term suggests his sensitivity to market performance, particularly during the 2018 market correction. As Russell Investments notes, “Trump is still likely to regard the share market as a barometer of his success and would prefer to see it go up.” This dynamic was evident when the 19.8% market decline in late 2018 influenced a pivot toward the Phase One trade deal with China.
Political constraints also play a crucial role. The Republican’s razor-thin majority in the House means that budget-conscious Republican members could effectively block or modify aggressive fiscal expansion. As the 2026 mid-term elections approach, political pressure could intensify if policies begin to negatively impact voters through higher inflation or reduced federal services. Perhaps most significantly, Trump’s mandate centres primarily on improving cost of living conditions. This focus may actually constrain the implementation of aggressive tariff policies, as these would likely increase consumer prices. Survey data indicates that concerns about globalization and trade ranked relatively low among voter priorities, suggesting limited public appetite for policies that could increase living costs.
Investment Opportunities and Sector Analysis
The evolving policy landscape creates distinct investment opportunities across various sectors and geographical regions. Several key areas warrant particular attention: Equal-Weight U.S. Exposure The potential shift toward an ‘America First’ agenda could benefit a broader range of U.S. sectors beyond technology. The S&P 500 Equal Weight Index currently trades at a 20% discount to the market cap weighted index on a forward priceto-earnings basis, while maintaining strong earnings growth projections. This suggests potential opportunities in domestically-focused U.S. companies that have more to gain and less to lose from potential trade restrictions. Services-Based Economies Countries with significant service-based export sectors, particularly India and the UK, may prove relatively resilient to increased tariffs on manufactured goods. As noted in the Betashares analysis, “Countries like India and the UK may be net beneficiaries from increased tariffs and protectionism, given a large proportion of their exports are services-based.”
Defense and Security Sector NATO data shows a clear trend toward increased defense spending, particularly among European nations. This trajectory could accelerate under a second Trump administration, potentially benefiting global defense contractors. The sector may see additional support from U.S. efforts to reduce its current account deficit through international defense deals.
Commodities and Energy Security The geopolitical environment suggests strong potential for certain commodity exposures:
• Gold continues to serve as a traditional safe-haven asset during periods of geopolitical tension
• Uranium presents opportunities as countries prioritize energy security and decarbonization
• Traditional energy resources maintain strategic importance in the context of energy security concerns
Strategic Investment Framework and Conclusion
In developing a strategic framework for investing under Trump’s second term, it’s crucial to recognize that the starting conditions are markedly different from 2017. Current market valuations and economic indicators suggest a more constrained environment for investment returns, requiring a more nuanced approach to portfolio construction. The earnings yield gap between U.S. shares and bonds has moved into negative territory, a stark contrast to the positive 3% spread that existed in 2016. As Dr. Oliver notes, “This means that the upside in share markets is potentially far more constrained than it was in 2016.” This valuation context suggests investors should maintain realistic return expectations and perhaps consider a more defensive positioning than during Trump’s first term.
Several key strategic considerations emerge for portfolio construction:
1. Geographic Diversification While U.S. markets may benefit from certain domestic policies, the higher starting valuations suggest careful consideration of international exposure. Markets with strong service sectors and domestic demand, particularly India and the UK, may offer valuable diversification benefits. As noted in the analysis, these markets may prove more resilient to trade tensions due to their service-oriented export profiles.
2. Sector Allocation The potential policy mix suggests strategic sector positioning:
• Defense sector exposure through global contractors
• Equal-weight U.S. market exposure to benefit from potential broader market participation
• Strategic commodity allocations, particularly in gold and uranium
• Careful evaluation of multinational technology exposure given potential trade restrictions
3. Risk Management The higher interest rate environment and increased geopolitical tensions suggest several risk management priorities:
• Maintain adequate portfolio liquidity given potential market volatility
• Consider inflation protection strategies given the potential impact of tariffs and immigration restrictionsMonitor bond duration exposure in light of fiscal policy risks
• Implement clear position sizing limits given elevated market valuations
Looking ahead, several key signposts warrant monitoring. The sequencing of policy implementation could provide important signals for portfolio adjustment. As Russell Investments notes, “An early focus on tax cuts and deregulation would be well-received by equity investors. However, investors might take fright if the first major policy moves are on tariffs and immigration.”
The interaction between policy implementation and market constraints will likely create periods of volatility, potentially offering tactical opportunities for well-positioned investors. However, the fundamental constraints identified - from bond market vigilance to political realities - suggest that the most extreme policy proposals may ultimately be moderated. For Australian investors, the implications extend beyond direct market impacts to currency considerations and regional trade dynamics. The potential for increased volatility in the U.S. dollar and regional trade relationships suggests maintaining appropriate currency hedging strategies and careful evaluation of Asia-Pacific exposure.
In conclusion, while Trump’s return to the White House presents both challenges and opportunities for investors, the environment differs significantly from 2017. The combination of higher starting valuations, elevated interest rates, and increased geopolitical complexity suggests adopting a more measured approach to risk-taking while maintaining focus on specific opportunities in sectors and regions best positioned to benefit from the evolving policy landscape. Success will likely come from maintaining strategic discipline while remaining flexible enough to adapt to policy developments and market responses. As always, careful attention to valuation, diversification, and risk management principles remains crucial for navigating this new phase in global markets.
References:
1. Oliver’s Insights (2024, November 19). Trump 2.0: Why investors should expect a somewhat rougher ride, but it may not be as bad as feared.
2. Betashares (2024, November 27). 5 key takeaways: Trump 2.0, geopolitical risk and investment landscape.
3. Russell Investments (2024, November 12). Trump’s election win: Key takeaways for investors globally
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