The first month of the new Trump Administration (Trump 2.0) has seen a wave of policy initiatives and a cacophony of noise. 

Financial Markets 

The markets have shrugged their collective shoulders and decided that all the noise is not a hindrance to enjoying capital gains in both equity and bond markets. 

The broadening of the performance of equity markets by sector and geography is particularly notable. 

Health care and industrials were the best-performing sectors in January, and Europe and Emerging Markets were the regional leaders. 

Even a “hot” US inflation print for January was not enough to derail the positive mood music. 

On one level, we think this is rational.  

Earnings season showed that corporates are in good health, particularly in the US. The drop in bond yields since their early January peak is helpful for all financial markets. 

We also consider the slew of announcements from Trump and the White House to be mostly noise. 

Elon Musk’s New Job. 

Take the Department of Government Efficiency (DOGE). 

Elon Musk is a master of self-promotion, so it is not surprising that his efforts are receiving considerable publicity. 

But the Federal Government spent $7 trillion last year. That is $7,000 billion. So, every time DOGE announces that it has found $1 billion of “waste”, one should send a metaphorical chocolate cookie to Musk (or his son) and tell them to return to work. 

Immigrant Policy 

Deportations of “illegal aliens” is another policy that has garnered a lot of airtime. But as we show, the US deports around 500,000 people a year. 

Trump 1.0 deported fewer people (1.8 million) than Biden did (2.0 million).  

We are surprised that some commentators have been raising forecasts for wage growth because of this. 

There may be fewer illegals crossing the southern border under Trump. 

We will have to see.  

If that happens, it could impact wage growth in industries such as construction and agriculture, which have traditionally ignored niceties such as having a social security number or a passport. 

But it is far too early to tell if that will happen. 

Tariffs 

Tariffs, the third initiative, will be inflationary if imposed on a wide range of goods. 

But so far, Trump appears to be using them as a bargaining chip. But again, let’s see how this unfolds. 

Read the latest on the tariff situation

Inflation 

The impact of all these things on the inflation outlook will be the critical determinant of whether financial markets show more concern than they have up to now. 

Inflation expectations in the US have ticked up a little, but that may have as much to do with current inflation being higher than had been hoped for. 

After all, an inflation swap is priced based on the average inflation rate over the swap’s life, so if the current inflation rate is higher, it makes sense for the swap rate to increase slightly. 

Read about the impact of the BOE lowering interest rates.

Market View 

So, broadly speaking, we share the market’s current scepticism about these initiatives having a big impact. 

However, there is no doubt that they are creating new policy uncertainty. 

Some old-timers might think this should create a higher risk premium for equities, but this indicates a lack of understanding of the modern zeitgeist. 

Our asset allocation committee did suggest trimming equity positions for any portfolios that saw equity allocations drift up in the fourth quarter of 2024, when global equities outperformed gilts by nearly 10%. 

We stand by that decision and will monitor any hints that the market needs to pay closer attention to the uncertainties associated with Trump 2.0. 

  

Thank you to Waverton Investment Management