What’s Next After Trump’s Victory? Key Insights for Investors
Yesterday the Fed just cut interest rates by 0.25%, which was expected. That’s good because the market has been bullish since Trump won, and no one wants any surprises right now.
Long-term interest rates have been rising, especially after Trump’s win, which hurt bond and REIT prices but has been great for banks.
Markets are now pricing in increased deficits. With Trump back, his spending proposals are double what Harris had planned. Plus, he may cut taxes, reducing government revenue. This could push the U.S. deeper into debt, which is why interest rates are going up—to compensate for the higher risk on U.S. bonds.
The rate increases we’re seeing aren’t driven by inflation, nor because Trump is pro-high interest rates. In fact, it’s quite the opposite. He’s likely to pressure the Fed for more aggressive rate cuts. He’s even suggested replacing Powell as Fed Chairman. But Powell has made it clear he won’t resign, and technically, the Fed is supposed to be independent from government control.
A higher interest rate environment would strengthen the USD, which means most other currencies would weaken. And as long as the U.S. lacks fiscal discipline, long-term rates might stay elevated despite the Fed cutting short-term rates.
On fiscal policy, Trump might cut government spending in some areas even as more debt is issued. He may scale back military expenses, especially when it comes to “other people’s wars” like Ukraine and Israel, just as he withdrew troops from Afghanistan during his previous term.
With Congress now under Republican control, they may use the threat of a government shutdown to enforce spending cuts. And this time, it’s a real possibility since Republicans control both the Senate and the House.
Trump might be the one to rein in government spending. Elon Musk may play a bigger role to help Trump instill fiscal discipline. If Trump is successful, bond yields might finally come down, but it could take many months, or even years. Don’t expect rates to drop quickly anytime soon.
This means there might be limited upside for bond and REIT prices, but it’s good news for those collecting interest income. Banks should continue to benefit from solid net interest margins. But for this to continue, the economy has to stay strong.
On the crypto front, Trump is a supporter, and Bitcoin has hit a new all-time high above $75,000. Meanwhile, gold prices have dipped. But let’s not get carried away—these might just be knee-jerk reactions to Trump’s win. There are other factors at play. For example, crypto is closely tied to tech stock performance, while gold is influenced by geopolitical tensions, confidence in the USD, and central bank buying.
Some people think Trump’s return is bad for China. But China stocks actually rallied after he won. This time, China seems better prepared to handle Trump’s policies than before. Markets are betting that if Trump raises tariffs, Beijing will counter with more stimulus measures.
Trump may actually be less of a hawk on China compared to Biden and Harris, who have been more driven by ideological battles. Trump is more about making money. Ideologies are risky because they often lead to conflict. The tension between the U.S. and China under Biden was about winning allies and spreading American values. For Trump, it’s simpler: if he can strike a deal, he’s happy. This could mean a more stable relationship with China moving forward.
2024 has been a good year for most asset classes despite all the worries. The same can be said for 2025 and beyond. The trick is not to get influenced by these noises. Typically, the first year of a new president’s term isn’t that bullish for stocks, but that doesn’t mean they can’t go up. History is just a guideline, not a guarantee. I’m still bullish and positioned on the long side.