Donald Trump’s resounding US Presidential election win on November 5th has brought control of Congress, the House of Representatives, and the Senate in a Republican clean sweep. Now with more power than ever before, could Trump’s second term and promises for steep tariffs have a significant impact on institutional trading in 2025 and beyond?
The President-elect has promised to herald sweeping changes throughout the nation’s economic landscape, and Trump’s protectionist approach is likely to focus on the implementation of sweeping tariffs on global trade.
While investors were fearing the impact of tariffs ranging from a general global 10% rate to rates as high as 60% for Chinese imports, Trump recently reiterated his position that as one of his first executive orders on January 20th, a 25% tariff will be imposed on all products coming into the US from Mexico and Canada, suggesting that the high tariffs will remain in place until the nations place more stringent measures on their borders to prevent immigration.
Trump also suggested that China would be subject to an additional 10% tariff, and cited the export of drugs like fentanyl as a root cause of the measure.
Although Wall Street has been riding the crest of a post-election relief rally in recent weeks, Trump’s tariff threats have so far prompted some isolated price movements.
While analysts suggested the slower market reactions have been caused by uncertainty over the credibility of Trump’s threats, stocks like General Motors (NYSE:GM) and Ford Motor Co. (NYSE:F) fell 7% and 2% respectively owing to their supply chain exposure to Chinese and Mexican markets.
Should Wall Street Take Trump’s Threats Seriously?
Wall Street’s lack of concern for Trump’s latest statements about his upcoming tariff plans could be attributed to whether or not the President-elect is willing to follow-up on his threats.
William Watts, MarketWatch markets editor, points to 2019 when Mexico avoided similar tariffs from the Trump regime after the nation sought to take action to reduce drug supply and secure their borders.
Should we find ourselves heading for steep 25% tariffs on Mexican and Canadian imports by January 20, 2025, along with 35% tariffs on trade with China, we could see Wall Street react with deeper price swings for affected stocks.
Will Inflation Hurt Market Traders?
Although Trump’s tariffs were implemented in a low inflation and interest rate environment during his first Presidency, he inherits a more challenging economic outlook ahead of his second term.
President Biden and the Democrats were largely punished at the ballot box for what the US public perceived as a bungled response to high inflation, and Trump’s control of the economy is likely to be a defining factor during his second term.
However, market analysts believe that Donald Trump’s tariffs, if they’re implemented at the rates the President-elect is promising, could cause an increase in inflation, with higher costs of imported products leading to a fresh cost-of-living squeeze on consumers.
With warnings that tariffs generally pass expenses on to consumers, the result could be a resumption of the price rises we’ve become accustomed to throughout 2022 and 2023.
Additionally, Trump has plans to exercise more influence over the Federal Reserve, which could see the Fed’s typical tactic of fighting inflation through interest rate hikes change. This would throw us into uncharted territory in terms of what comes next, and this could carry significant implications for hedge funds in their pursuit of alpha.
Trump has famously claimed to favor a weaker dollar, and on the surface, his tariffs could help to push USD lower. Typically, the weaker dollar can favor investors that buy into stocks with foreign interests and this could offer opportunities for adding internationally-focused companies that aren’t impacted by tariffs.
However, Trump’s tariffs may incentivize other nations to weaken their currencies further against the dollar, in a bid to make their products more competitive across international markets.
Fortunately, this uncertainty is set to play into the hands of high-frequency market traders seeking to take advantage of the rollout of news items surrounding the facts and fiction of Trump’s Presidency as and when they arrive.
How are Hedge Funds Responding?
We’re already seeing signs of a shift in strategy among hedge funds as a result of Trump’s election clean sweep.
More funds are strategically selling domestic utilities stocks while simultaneously increasing investments in US materials with a focus on chemicals and mining.
This change of tact, as identified by Goldman Sachs, has seen hedge funds buy into materials sectors like chemicals, mining, and paper products, with the materials-focused S&P index climbing over 9% throughout 2024.
In three of the first four weeks of November, hedge funds have been increasing their investments in materials, highlighting it as a core facet of their post-election strategies.
Why the paradigm shift? More hedge funds are moving away from dividend-paying safehavens like utilities to back the revival of US manufacturing, suggesting that an increase in industrial demand is set to take place over Trump’s second term.
With much of this growth more likely to occur in chemicals and mining, hedge funds have identified an opportunity amid the uncertainty of the President-elect’s tariff plans.
As a result, we’re likely to see more institutions look to prime brokers to take out materials-focused CFDs while backing the prospect of tariffs driving a greater focus on domestic supply chains and industry.
Making Sense of the Next Four Years
It’s fair to say that Trump’s resounding election victory and subsequent Republican control of Congress, the House of Representatives, and the Senate has made the next four years difficult to predict.
However, Wall Street has adapted fast to the prospect of tariffs in 2025 by backing US industry against the backdrop of a possible return to inflation.
Whether Trump’s tariffs are as severe as he suggests or a major bargaining chip, Wall Street is unlikely to be the same by the end of the President-elect’s heavily-anticipated second term.
