The president-elect follows the markets closely. He bragged frequently about how well stocks performed in his first term in office, and said they had boomed this year in anticipation of his return to the White House.
Since Election Day, a great deal of financial analysis has been devoted to one central question: How will the new Trump administration affect the markets?
But another important question isn’t being asked as frequently: To what extent can the markets serve as a check on the power of the president? With Republican control of the House and Senate and a conservative majority on the Supreme Court, Donald J. Trump will face fewer curbs from the nation’s political institutions than he did in his first term. Given this vacuum, it’s reasonable to wonder whether the markets will play an outsize role.
I’d say that in this stage of the presidential transition, the evidence is mixed. Yes, in a tenuous and unpredictable way, the markets are likely to influence the next administration’s decision-making and, occasionally, serve as a check on some of Mr. Trump’s most immoderate behavior.
But I wouldn’t go far with this. For one thing, financial markets have come to discount — you might say “normalize” — actions and statements that would set off strongly negative reactions if made by other public figures. And Mr. Trump’s more pugnacious statements are often viewed as initial bargaining positions. Still, from the standpoint of the markets, Mr. Trump can probably go quite far in enacting his campaign promises as long as corporate profits rise and the economy grows.
The events of the last week or so are a case in point. Mr. Trump set out to calm the markets with appointments of urbane experts known for a nonideological approach to finance, but also unleashed a global storm with the announcement that he planned to impose new 25 percent tariffs on Canada and Mexico and add a 10 percent tariff on China. Mr. Trump seems intent both on mollifying the markets and on disregarding their message when it is inconvenient. So far, this tactic is working.
Late last Friday, Mr. Trump designated Scott Bessent, a familiar figure in finance, as his choice for Treasury secretary. Stocks and bonds rallied on the news on Monday.
But later that day, Mr. Trump declared on social media that he would impose the new tariffs as soon as he returned to the White House. These measures, as well as deeper and broader levies promised during his campaign, are a negative development in the estimation of most economists. All else equal, tariffs tend to raise prices, hurt consumers, impede economic growth and disrupt global trade and foreign currency markets.
But the markets weren’t troubled. The S&P 500 hit another record on Tuesday.
It’s calm on Wall Street right now, yet investors will need to hedge their bets.
Bullish Voices
Mr. Bessent is a hedge fund billionaire and a Yale graduate who speaks the pragmatic, nonideological language of the markets. He once ran money for George Soros, the Republican bête noire. Of course, Mr. Bessent says he supports Mr. Trump’s policies. Such fealty is a prerequisite for a high-level administration post.
In manner, he is being compared to Steven Mnuchin, the Treasury secretary in the first Trump administration. Despite chaotic conditions elsewhere in the executive branch and criticism from both the left and right, Mr. Mnuchin, a veteran banker and film financier, and also a Yale graduate, was generally esteemed in financial markets.
Similarly, the markets have greeted Mr. Bessent with undisguised appreciation.
Take “In Bessent We Trust,” a brief note to the clients of Yardeni Research, an independent financial markets research firm headed by the veteran economist Edward Yardeni. The note quoted Mr. Bessent extensively because Mr. Bessent agrees with Mr. Yardeni’s optimistic outlook. In January, Mr. Bessent wrote to his hedge fund clients that a great economic boom was probably ahead of us.
“Our base case is that a re-elected Donald Trump will want to create an economic lollapalooza and engineer what he will likely call ‘the greatest four years in American history,’” Mr. Bessent said. “Economist Ed Yardeni believes that post-Covid America has the potential to have a boom similar to the ‘Roaring Twenties’ of a century ago. We believe that a returning President Trump would like this to be his legacy.”
Yardeni Research wrote approvingly of Mr. Bessent’s focus on the Trump tax-cutting plans, which, the Yardeni group said, could lead to “better-than-expected growth” and “help to reduce the federal deficit by generating more tax revenues.”
This is a positive gloss on the outlook for Mr. Trump’s economic proposals, which I think are likely to swell the budget deficit and disrupt the economy if higher tariffs and mass deportations of undocumented immigrants actually take place. But if you accentuate the positive side of Mr. Trump’s promises of lower taxes and a lighter regulatory hand on businesses, and minimize the negatives, then the current bull market, which began under President Biden, could well continue under President Trump.
No doubt, Kevin Hassett, whom Mr. Trump has chosen to head the National Economic Council, will do what he can to ensure that the stock market rises. Mr. Hassett is a traditional, credentialed economist who served in the first Trump administration. Yet he has said that tariffs can be negative for economic growth and that, by expanding the labor supply, immigration tends to help the economy.
He is an author of “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market” — an interesting but spectacularly ill-timed book on investing. It said the market was undervalued (the Dow was below 11,000 then) and would grow tremendously in the years ahead.
The problem was that the book came out in September 1999 — just months before the dot.com bubble burst in March 2020. As a guide for market traders, Mr. Hassett’s book was unhelpful, to say the least. But over the long run, it was certainly right. The Dow reached that 36,000 benchmark three years ago and has surpassed it. Buying and holding a diversified stock portfolio over decades has been a brilliant approach. Getting through the bad years is a trial, however, requiring plenty of safe cash holdings as well as ample patience and fortitude.
Tariffs and Immigrants
Mr. Trump has made it impossible to disregard his policies on tariffs as well as immigration.
He raised these issues without any apparent outside prompting, threatening in posts on Truth Social, the online platform owned by his own media company, to impose 25 percent tariffs on goods from Canada and Mexico until “Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!”
In addition, he assailed China, threatening to add a 10 percent tariff to Chinese products because, he claimed, China was sending illegal drugs. “Representatives of China told me that they would institute their maximum penalty, that of death, for any drug dealers caught doing this but, unfortunately, they never followed through,” he said.
The currencies of Mexico and Canada declined against the dollar, while the Chinese renminbi, a controlled currency, became the object of intense speculation in futures markets, where traders have been wagering on how low Chinese officials will allow the renminbi to fall.
Officials in all three countries issued protests. In Mexico, President Claudia Sheinbaum raised the prospect of retaliatory tariffs, a stronger response than might have been expected from her immediate predecessor, Andrés Manuel López Obrador.
At a minimum, Mr. Trump’s salvo served as a reminder of his disruptive global agenda. It revived longstanding questions about the reliability of the United States as a trade partner and plunged many countries, businesses and investors into difficult discussions about how to navigate the next several years.
Yet the U.S. stock market was largely unmoved by these concerns. The S&P 500 has gained more than 30 percent over the last 12 months.
It’s still early. In a contest between ideology, politics and the markets, I’m not confident that Mr. Trump will always come down on the side of the markets. Nor am I sanguine about the short-term judgment of the markets on much of anything. So I’m not counting on the stock or bond markets to be reliable bulwarks against excesses, in the way that robust political institutions would be.
I expect the new administration to try to help the markets rise. And if Mr. Trump’s policies interfere with the ability of companies to make profits and of investors to prosper, I expect course corrections. That may be scant consolation, but I think it’s realistic. In the meantime, enjoy the boom as long as it lasts. But hedge your bets.
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