THE implications of a second Trump presidency could significantly shape the US economy, the global economy, financial markets and financial assets. Investors and policymakers are preparing for possible changes in fiscal and monetary policy, as well as broader economic trends that are likely to play out in the coming years.

US Economic Outlook

A Republican “red shot” – control of the White House, Senate and House – has raised expectations of substantial tax cuts, deregulation and other pro-growth policies. The cornerstone of Trump’s economic plan will likely be an expansion of the Tax Cuts and Jobs Act of 2017 (TCJA), benefiting both individuals and businesses. Lower taxes, coupled with anticipated deregulation, particularly in sectors like banking and energy, could catalyze business spending, particularly benefiting small businesses that rely heavily on the U.S. domestic economy. While these measures could fuel U.S. GDP growth, they could come at a high fiscal cost, likely to add about $5 trillion to the national debt by 2034. Higher deficits, combined with proposed tariff increases and to a restrictive immigration policy, could introduce inflationary pressures. raise long-term interest rates.

Global economic impact

Trump’s trade and migration policies are expected to have mixed effects on the global economy. Tariffs, which he suggested as a possible negotiating tool, could lead to increased trade tensions with key partners, which could hurt global trade. U.S. tariffs on imported products could raise prices domestically, impacting U.S. consumers, while also increasing costs for foreign exporters. Additionally, stricter immigration policies could lead to labor shortages in some sectors, further pushing up domestic inflation. The overall impact on global markets would depend on how other economies respond, including possible retaliatory tariffs, but the United States adopting a more isolationist stance could push other countries to strengthen their trade relationships outside the United States, potentially reducing American influence over time.

Impact on financial markets

U.S. stock markets reacted positively to Trump’s victory, with investors betting on policies that would improve corporate profitability and economic growth. Stocks, particularly in cyclical sectors such as financials and industrials, surged after the election. U.S. regional banks, for example, have seen a notable rise in valuations, fueled by hopes of easing regulatory restrictions and looser capital requirements. Mid-cap stocks, which have underperformed large-cap tech stocks in recent years, are also expected to benefit from Trump’s potential fiscal policies, encouraging a shift in market leadership from tech to more value-oriented cyclical assets . However, rising national debt and the potential rise in interest rates in response to inflation could create a countervailing force, putting pressure on fixed-income asset valuations and potentially dampening the stock rally in over time.

Federal Reserve Policy and Interest Rates

The US Federal Reserve (Fed) lowered its benchmark rate on November 7 by 25 basis points (bps) following its 50 bps cut in September, but Chairman Jerome Powell stressed a cautious approach, saying future policy changes would instead be based on real economic data. only preventive hypotheses. Still, Trump’s proposed policies could prompt the Fed to take a more conservative rate-cutting path as inflationary pressures build with possible fiscal stimulus. Markets are now pricing in fewer rate cuts than before, as a Republican-led White House could introduce a pro-growth agenda that would ease the need for aggressive monetary easing. If inflation proves more persistent than expected, the Fed could keep interest rates higher to contain it, leading to a “shallower” rate cut cycle. Such terms would offer investors the opportunity to earn relatively high bond yields while potentially benefiting from the stable income of long-term debt instruments.

Outlook for financial assets

The policies of a second Trump administration are generally seen as favorable for U.S. stocks and some bond markets. The potential for sustained economic growth, tax cuts and deregulation could continue to fuel a bull market, as indicated by the strong post-election rally and record highs in the S&P 500. Although stocks could benefit In the near term, higher deficits and inflation expectations could put downward pressure on bond prices, particularly longer-term U.S. Treasuries. Investors may, however, seek to lock in higher bond yields to protect against future rate volatility, while repositioning to longer maturities in anticipation of lower future returns.

Long term goal

For investors, it will be essential to maintain a long-term view as the market adapts to policy changes. Although short-term rallies may reflect optimism about Trump’s pro-growth agenda, balanced portfolios, based on economic fundamentals, are more resilient to volatility. Diversifying equity allocations, particularly into value and cyclical stocks, and positioning fixed-income portfolios to take advantage of current returns could support long-term goals.

In conclusion, although a second Trump presidency promises policies favorable to U.S. growth and corporate profits, rising debt and inflation concerns could offset some of those benefits. Investors should avoid reactionary portfolio changes, but instead stay focused on economic fundamentals and align allocations with their long-term financial goals.

Eugene Stanley is Vice President, Fixed Income and Foreign Exchange at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to professional, individual and institutional investors. Visit our website at www.sterling.com.jm

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