Paul R. La Monica
There is still a month to go until Donald Trump is inaugurated. But if this week's drama about a possible government shutdown is any indication, the next four years could be a roller-coaster ride for investors.
Concerns about a shutdown underscore how messy Trump 2.0 could be for the markets. Yes, Wall Street mostly likes the expected policies that Trump and the Republican Congress have talked about putting into place.
Deregulation could open up the floodgates for mergers and acquisitions. Lower corporate taxes should boost profits and margins while a tax cut for consumers, combined with fiscal stimulus, could lift consumer confidence and lead to an increase in spending.
But Trump's tactic of negotiating in public could also create a lot more volatility. Investors won't just be watching for how he acts with Democratic leaders in Congress, but also members of his own party.
There's also the issue of tariffs. Will Trump really push for much higher tariffs on Chinese-made goods, or is the tough talk just part of the proverbial "art of the deal" for him?
And what about closer economic allies? Will Trump also risk alienating countries such as Canada and Mexico, as well as the leading nations of Europe? Tariffs could be inflationary, particularly if other nations counter with tariffs of their own that risk starting a trade war.
The stunning market rally after the election was partly predicated on the hope that Trump's rhetoric would cool after he took office. Now, Wall Street isn't so sure.
"The pro-growth policies of tax cuts and deregulation are at risk of being upended by draconian tariff policies and at this point it's unclear which of those forces will win out next year, so the only thing we can be certain of is that there will be even more uncertainty in early 2025," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
Adding to the confusion, Trump is also relying on guidance from Tesla and SpaceX CEO Elon Musk (who also happens to be the wealthiest man on the planet), and entrepreneur Vivek Ramaswamy, who will co-head the to-be-formed Department of Government Efficiency, or DOGE, for guidance.
It doesn't bode well that Trump and DOGE have differing opinions on the budget and potential spending cuts than some Republican leaders in Congress.
"The government's inability to pass a stopgap budget after several negotiation attempts...weighs on the market," Ivan Feinseth, chief market strategist of Tigress Financial Intelligence, wrote in a report Friday.
Feinseth added that this now raises "concerns over a potentially difficult legislative backdrop for Republicans next year, even with control of all three houses." In other words, Trump may have a more difficult time getting some of his legislative initiatives passed than previously thought.
That could increase pressure on stocks in the near-term, particularly since valuations for stocks remain at historically high levels. The S&P 500 is trading at 21.5 times 2025 earnings estimates.
"In the immediate aftermath of the election, there was a sigh of relief, " said Indrani De, head of global investment research at FTSE Russell. But she added that "uncertainty historically has a big impact on valuations."
Add that all up and it isn't a surprise to see market volatility come roaring back. Stocks have given up their postelection gains. The yield on the 10-Year Treasury has spiked to about 4.5% due to concerns about potential inflationary pressures from tariffs and tougher immigration policies...the latter of which could push up wage growth. That may be a reason why the Federal Reserve is now forecasting fewer rate cuts in 2025. And the VIX, Wall Street's so-called fear gauge, has risen to just below 20.
If the market moves of the past two months are any indication, the next four years are going to be eventful for investors to say the least. To quote Pro Football Hall of Famer Terrell Owens, "Get your popcorn ready."
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 20, 2024 13:41 ET (18:41 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments