Everything happened exactly as investors wanted it to: Donald Trump, with his promises to significantly liberalize tax laws, raise tariffs on imports, and “make America great again,” won a convincing and quick victory, which fortunately was not accompanied by any lawsuits or, worse, social unrest. The reaction of the markets was enchanting: in two days, the major indices added between 4.5% and 6%, and the S&P 500 almost reached the magic 6,000 mark, which was considered an absolutely unbelievable scenario at the beginning of the year.This is a quick review from Ivan Kompan, Edinburgh Business School analyst.
Now, on to business! The newly elected President faces a challenging task: how to deliver on campaign promises. President Trump inherits a stable economy—growth is ongoing, inflation has moderated despite exceeding the 2% target, and a 4.1% unemployment rate remains reasonable. However, a significant issue looms: national debt has reached $35.98 trillion, or 123% of GDP. The proposed tax cuts could potentially deepen the budget deficit, pushing debt servicing costs—already higher than the military budget—even further. To mitigate this, a Fed rate cut would be ideal to make debt servicing cheaper.
However, Fed Chair Powell appears unhurried. On Thursday, under his lead, the Monetary Policy Committee decided on a cautious 25 bps rate cut. Powell stated, “Nothing in the economic data suggests urgency,” a stance unlikely to satisfy the incoming President. Appointed by Trump in 2018, Powell has maintained independence, resisting past pressure from Trump’s administration to lower rates. With his term lasting until 2026, Powell seems disinclined to bend, even refusing to speculate on resignation if Trump requests it. This independence is positive news for economic stability, as central bank autonomy is fundamental in developed economies.
One potential ally in deficit reduction is Elon Musk, Trump’s top campaign supporter, rumored to be considered for a government role. According to Barron’s, Trump hinted at Musk possibly leading a “government efficiency department.” Musk has publicly suggested he could cut federal spending—$6.75 trillion in FY2024—by at least $2 trillion, a target that seems ambitious.
While promises are numerous, Musk stands to benefit from his support. He could see increased collaboration with NASA, approvals for satellite launches, and more regulatory leeway. Ironically, the proposed elimination of EV subsidies, while seemingly harmful to Musk, may work to his advantage, as it could weaken Tesla’s competition in the long run. This dynamic reflects the complexities of free-market principles. In conclusion, the initial response aligns with predictions, though bond markets hint at inflationary concerns. The stock market’s positive reaction post-election was coupled with rising yields on 10-year bonds, indicating institutional investors foresee potential inflation pressures and anticipate the Fed may hold rates steady longer than anticipated.
*And finally, we would like to remind you that the information you have just listened to is not an investment advisory. Remember – investments in the stock market are always tied up with financial risks. So be careful and cautious.
