Donald Trump’s victory in the recent presidential election has significantly increased uncertainty for investors.
In the first week after Trump was elected the next President of the United States the S&P 500 gained 3.5%. On November 11th this index of the largest US stocks closed at an all-time high of 6,000. In contrast the US Aggregate Bond Index lost 0.4% over the same week. On November 14th the interest rate on US Ten-Year Treasuries hit 4.5%, the highest level since June, having risen steadily from a 3.6% year to date low in September (as interest rates on bonds rise their prices fall). Both markets have since reversed part of these moves, in part due to nervousness over the intensification of the Russia-Ukraine war.
It is not at all unusual for stocks and bonds to go in opposite directions. The stock market tends to be enthusiastic since most of its investors are looking to gain from future growth. The bond market is more cold-blooded as the participants in it are more focused on risk. And in many circumstances the same economic environment can be positive for stocks yet negative for bonds and vice versa. At this moment it seems to me that both the stock market and the bond market - but especially the stock market – are underestimating the degree to which a second Trump administration increases uncertainty.
Trump and the Stock Market
Stock market investors appeared to be reacting to several factors perceived as positive. Trump’s clear – though narrow – victory eliminated the risk of the post-election turmoil and violence that he himself had stoked after losing the 2020 election. Trump’s promise of additional tax cuts for big corporations and wealthy individuals, as well as deregulation, also raised expectations for corporate earnings. An additional factor giving equity investors confidence is Trump’s well-known fixation with the stock market’s performance and a belief that he won’t want to jeopardize it.
It seems that stock market investors are overlooking the significant rise in uncertainty that a second Trump administration represents, in stark contrast to the continuity that a Harris administration would have delivered. This uncertainty derives not just from particular policy issues but from the chaotic and unpredictable foreign and domestic policy decisions that became all too familiar during his first term of office and his personalized style of governance.
Deregulation and tax cuts will certainly be positive for corporate earnings, but Trump’s proposed tariff hikes – in addition to being inflationary - will likely lead to retaliation by trade partners against US industries, as happened in his previous administration. Trade wars would hurt earnings for companies across the economy. The mass deportations Trump has planned would disrupt operations in several sectors, as well as hurting demand for consumer goods. Trump has very clearly stated his intentions on tariffs and mass deportations but how these will be implemented and how big their negative effects on corporate earnings will be remains highly uncertain. Private prison stocks have already seen a massive rally, however, as these companies are expected to be called on to build and manage camps for immigrants being deported.
During Trump’s first term in office, he often caused Individual companies’ share prices to collapse or – more rarely – soar with a single tweet. We can expect more of the same in his second term. We are already seeing corporate leaders moving to get personally closer to Trump in order to protect their companies from potential attacks on social media, anti-trust investigations, cancellation of government contracts and other potential forms of retaliation (the highest profile recent example was Jeff Bezos’s decision to block the Washington Post’s planned endorsement of Kamala Harris). Others will be hoping to secure new contracts, targeted subsidies or exemptions from tariffs, among other favors. In the last two years, Trump has switched from wanting to ban TikTok to supporting it and from being opposed to cryptocurrency to proclaiming his intention to make the US a cryptocurrency leader. In both cases, these changes of mind followed well-placed political donations. Post-election the shares of most electric vehicle manufacturers fell sharply on the expectation of less favorable government policies, but Tesla shares soared, likely due to controlling shareholder Elon Musk’s closeness to Trump. Crony capitalism of this nature is antithetical to the transparency and equal enforcement of the laws that financial markets depend on.
The US economy continues to be the envy of the world and US companies overall are profitable and resilient. These solid fundamentals have not changed. But the degree of uncertainty for future earnings has increased significantly, and even more for so for non-US stocks. With US stock market valuations close to all-time highs, this uncertainty is not currently being reflected in prices.
Current Case/Shiller Price Earnings Ratio of the US Stock Market: Close to a Record.
Trump and the Bond Market
For bond investors two major concerns have been top of mind in recent weeks and Trump’s victory has enhanced both. The first is the US government’s growing debt burden and the second is inflation. Government borrowing soared from $20 trillion to $28 trillion under Trump, due to his tax cuts and bipartisan COVID spending and the deficit has continued to grow under the Biden administration, albeit at a slower pace. Federal debt now exceeds 120% of GDP, the highest level since the end of WW II.
For a long time, the bond market was able to shrug off worries about this high level of indebtedness, but concern has been mounting now that higher interest rates have increased interest payments to 13% of government spending while neither party has shown genuine interest in addressing the problem. While Harris proposed new spending during her campaign, this would have been partially offset by the expiration of Trump’s tax cuts. Trump, in contrast, proposes to cut taxes further and his proposed tariffs would likely replace only some of the lost income tax revenue. Independent economists estimated before the election that Harris’s plans would increase the deficit by $3.5 trillion while Trump’s plans would increase it by $7.5 trillion. Trump’s proposed new “Department of Government Efficiency” is unlikely to find meaningful savings without drastic cuts in what the public considers to be core government functions. Elon Musk’s claim that he can cut $2 trillion in spending would essentially require eliminating everything but spending on defense, Social Security, Medicare and interest. He is highly unlikely to meet his target. I believe that the bond market is right to be concerned that US government borrowing will continue growing at a rapid pace over the next four years.
As for inflation, for several months core inflation has been stuck at close to 3% annually, above the Federal Reserve’s 2% target (consumer price inflation has come down to 2% but includes food and energy, which are more volatile). This had led to expectations of rate cuts being scaled back, even before the election. Even though Trump campaigned on bringing prices down (next to impossible without a recession) the pillars of his plan for government are tariffs and mass deportations, as well as high end tax cuts, all of which are inflationary. Just as Trump’s steel tariffs in his first term drove up the price consumers paid for appliances such as washing machines, the across-the-board tariffs he is now proposing would increase the prices not just of imports but of domestic products with foreign inputs and of domestic products that compete with imports. The mass deportations of immigrants that Trump plans to initiate on taking office are likely to cause major labor shortages in the food and agriculture sectors, among others. This will lead to higher prices for groceries and potentially even shortages. The increased federal deficit due to tax cuts is also likely to be inflationary.
Inflation may very well have already bottomed. If Trump does indeed implement his campaign promises the Federal Reserve will likely find itself unable to continue cutting interest rates. Long term US interest rates seem likely to continue rising and bond investors need to be cautious.
US Debt/GDP has doubled in the last 25 years:
Trump and Sustainable Investors
Trump’s first administration was hostile to sustainable investing and his second administration is likely to be even more hostile to what his allies call “woke capital”. When Trump was last in office the SEC issued regulations making it harder for activist shareholders to submit resolutions to annual shareholder meetings and the Department of Labor prohibited the pension funds it regulates from considering “non-financial factors” (i.e. Environmental, Social and Governance) in their investment decisions. These measures were reversed by the Biden administration but are now likely to be reinstated and in the meantime anti-ESG rules were put in place by states such as Texas, Florida and others. The SEC under Biden began to require companies to disclose their exposure to climate risks. This is likely to be reversed as well. Overall financial regulation is likely to become less protective of shareholders and consumers and more aligned with the management of large corporations.
Paradoxically the first Trump term also saw strong and growing interest in sustainable investing and increased investor flows into sustainable strategies. This bandwagon effect led all kinds of investment products to be given the label of “ESG” or “Sustainable” when they were not. During the Biden administration high oil prices and political backlash – often backed by the oil industry – led many latecomers to sustainability to back away from it. This has led to a clearing out of the pretenders and the “greenwashers”, leaving a smaller but higher quality sustainable investing industry. Sustainable investing is not going away because the issues it seeks to address are not going away either. The long-term case for investing sustainably remains intact.
Trump and Climate Change
Trump has called climate change a hoax and has promised to increase US oil production even beyond the current record-high level. He also has committed to withdrawing from the Paris Accord that sets global targets for reducing carbon emissions and to repealing the Inflation Reduction Act, the Biden administration’s very ambitious package of green infrastructure investment. His antipathy to wind power, in particular, is well known. Across the Republican Party, the antipathy to the transition away from fossil fuels is deep. All of this sounds like a disaster for investors in clean energy, not to mention those of us who want the US to address the growing climate crisis with urgency.
But it’s not as clear as all that. There are several reasons to think that a Trump administration would not be as bad for the clean energy sector as seems apparent at first. The biggest of all is simple inertia: many investments stimulated by the IRA are already underway – quite a few of them in Trump supporting states – and can’t easily be cancelled without public backlash. Additionally, Elon Musk’s strong support of Trump may ensure that incentives for electric cars and investment in charging stations continue. The CEO of Exxon Mobil has publicly urged Trump NOT to withdraw from the Paris Agreement. Exxon Mobil is investing heavily in carbon capture technology and prefers the regulatory certainty that sticking to current climate policy would give it. Many utilities and other companies have major clean energy investments to protect. Political realities may yet prevail over ideology.
Investors should also remember that even during Trump’s first administration clean energy investment continued despite his hostility, while the coal industry continued to shrink, in spite of his support. It is, of course, better to have government support but the sector is no longer in its infancy and progress will continue to be made regardless of who is in the White House. After all, US carbon emissions peaked in 2007. Clean energy stocks, ETFs and mutual funds have been big laggards over the last two years and appear less vulnerable to bad news in any case. International clean energy investment opportunities abound. There is no doubt that a Harris administration would have been much better on the issue of climate change but that does not mean that progress will not continue, especially in the many states that are committed to the clean energy transition, not to mention the many countries whose governments continue to move forward.
Trump and Crypto
I have saved this topic for last because I do not consider cryptocurrency to be a serious asset class. Trump’s election victory sent Bitcoin and other cryptocurrencies, and crypto-related stocks, to new record highs. Many people have made a lot of money in crypto but there continues to be almost no practical use for it other than paying ransom money or buying illegal drugs and weapons. Its volatility means that it fails as a store of value as well. Cryptocurrency enthusiasts led by Elon Musk and JD Vance’s patron Peter Thiel were major backers of Trump’s campaign, however, leading Trump to express his support for more favorable regulation (under Biden the SEC has been hostile to crypto) and even for a US strategic cryptocurrency reserve. There is some concern that Musk, Thiel and their allies aim at destroying the US financial markets as they currently exist and rebuilding them on the basis of crypto, but this seems farfetched. Until a practical use is found for cryptocurrencies, they are likely to remain a purely speculative investment with no intrinsic value.
Do Not Panic but Do Pay Attention!
Donald Trump’s imminent return to the Presidency greatly increases the level of uncertainty for all kinds of investors and for sustainable investors in particular. This uncertainty is not yet reflected in stock prices and – to a lesser extent – in long-term bonds. Caution is therefore warranted. But as Adam Smith said : “There is a lot of ruin in a nation”. The US corporate sector remains dynamic and resilient. The clean energy transition will continue, and sustainable investing continues to make sense. Courage!
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