What to expect from the markets under Trump

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Call me a Cassandra. Many have. But I am already dreading the downturn that must surely come at some point during Donald Trump’s presidency. Yes, the short-term sugar high of deregulation and tax cuts is already upon us. But, judging by history, the US is way overdue for both a recession and a big market correction, and the risk vectors in play with Trump make it more likely.

Why should I be so negative, so early? One can easily argue that there are many reasons to be optimistic that the strong economy President Joe Biden built and Trump will inherit will continue to expand. There’s positive real income growth at the moment, plus productivity improvements, an expected recovery in global manufacturing and rate cuts, of course. 

Add to that things such as the coming Trump deficit spending, and the roll back of Biden’s antitrust policies, which will surely mean a boom in mergers and acquisitions, and you have a good case for another year or two of gains in US assets. This seems particularly so in areas like technology, finance (banks are gearing up for all that dealmaking), crypto (every time the billionaire investor Elon Musk tweets about Dogecoin it gets a boost), private equity and private credit.

And yet, even if the Democrat Kamala Harris had won the White House, I would be thinking carefully about what’s really driving this market. As TS Lombard said in a recent note to clients, “this business cycle has always seemed ‘artificial’, and it has been powered by a series of temporary or one-off forces, such as pandemic reopening, fiscal stimulus, excess savings, revenge spending and more recently [higher] immigration and labor force participation”.

Indeed, one could argue that the market environment of the past 40 years, with its trend of falling interest rates and massive bouts of monetary stimulus and quantitative easing after the great financial crisis, is artificial. We have a generation of traders who have no idea what a truly high interest rate environment looks like. The minute rates went up even just a little bit a few years back, you saw the dominoes fall — consider Silicon Valley Bank’s bailout or the surge in bond yields during the crisis that ended Liz Truss’s very brief stint as prime minister.

While I don’t actually think that Trump is going to add fuel to any inflationary fire with massive across-the-board tariffs (the Wall Street contingent of his administration wouldn’t countenance the market collapse that would result), you will probably see him use the US consumer market as a kind of chit to be traded for various economic and geopolitical gains. Germany not falling in line with America’s China policy? How about higher tariffs on European autos? This kind of dealmaking is itself risky. 

I very much doubt whether Trump will deport millions of migrants, as he has promised to do; again, the Wall Street crowd will push back on the inflationary effects. But this fundamental tension between what the Maga crowd wants, and what private equity and Big Tech want, is itself a danger. It will inevitably create points of instability and unpredictability that may move the markets one way or another. 

Unexpected policy divergences could easily combine with some of the more usual sources of financial risk to create a big market event.

Highly leveraged loans and private equity investments are a hazard of course, given that Trump will probably roll back an already lax regulatory environment at a time when these assets are becoming a bigger part of the portfolios of pensions and retail investors.

This, coupled with an expected scaling back of bank capital increases, is one of the things that has Better Markets president Dennis Kelleher worried. “I think we’ll get a two-year sugar high under Trump but down the road, we’re looking at a potentially catastrophic correction — something much worse than [the financial crisis of] 2008. That’s because we have a financial system that is essentially extractive.”

Crypto is another potential trigger. It may have no inherent value, but Columbia University law professor Jeffrey Gordon worries that as real-world assets and liabilities are increasingly denominated in crypto, it will have a channel into the real economy. “Stablecoins can dive substantially below par,” Gordon says. “We’ve seen this movie before, with prime money market funds.”

But if there is a liquidity crisis in crypto, there is no lender of last resort. You would just see a lot of imaginary value disappear, leaving real-world collateral calls and financing shortfalls.

I’d put Musk himself up there as another financial risk factor. The electric-car maker Tesla is on a tear because of the tech titan’s relationship with Trump. But at some point, the markets are going to realise that China can make its own electric vehicles for far less than Tesla can. Beyond that, US-China tensions may yet impact on Musk’s ability to make green cars in China. I would also be surprised if the big American oil barons, who are the real muscle in the Republican party, didn’t push back against Musk’s influence. Either way, Tesla’s stock price could take a big hit, and drag down the larger froth in areas such as artificial intelligence with it.

As someone still heavily invested in US stocks, I’m not wishing for any of this to happen. But I wouldn’t discount it either. Washington these days has a very roaring 20s vibe.

rana.foroohar@ft.com