Why Markets Are Betting on Trump’s Second Term

The prospect of former President Donald Trump making a comeback in the next U.S. presidential election has sparked a wave of speculation and strategic positioning among investors and financial markets. The reasons behind this are rooted in Trump’s previous term, which was marked by aggressive tax cuts, deregulation, and a strong focus on American industries, all of which had significant impacts on the stock market and economic sentiments.

During Trump’s presidency, the stock market experienced substantial growth, with the S&P 500 rising by about 45% from his inauguration in January 2017 to the end of his term in January 2021. This impressive performance was largely attributed to his administration’s policies, which prioritized economic growth and business profitability.

One major area where Trump made his mark was through the Tax Cuts and Jobs Act of 2017, which significantly reduced corporate tax rates from 35% to 21%. This move was praised by business leaders and resulted in a one-time surge in corporate profits, stock buybacks, and dividends. The legislation was designed to spur investment and job creation, though the long-term impacts on the overall economy are still debated.

Another aspect of Trump’s policy that pleased investors was his approach to deregulation. The Trump administration rolled back numerous regulations across key industries including energy, automotive, and finance. These actions were intended to reduce operational costs for businesses and eliminate what Trump often described as unnecessary bureaucratic red tape.

However, Trump’s economic policies also had their downsides. His penchant for engaging in trade wars, particularly with China, created volatility and uncertainty in the markets. The tariffs imposed on Chinese goods led to higher costs for American companies and consumers, and retaliatory tariffs by China affected U.S. exports, particularly in the agriculture sector.

Trump’s handling of the COVID-19 pandemic also drew criticism regarding its impact on both the economy and the stock market. The initial downplaying of the virus’s severity and the subsequent handling of the public health response were seen by many as factors that exacerbated the economic fallout.

Looking ahead, if Trump were to win a second term, markets are anticipating a continuation or even an intensification of these policies. Investors are particularly keen on more tax cuts and deregulation efforts, which they expect would drive corporate earnings and stock market gains.

Nonetheless, the anticipation of a second Trump term is also raising concerns among some investors. The unpredictable nature of his policymaking, especially in international relations and trade, could lead to increased market volatility. Furthermore, Trump’s previous criticisms of the Federal Reserve and its independence could pose risks to investor confidence and the general economic landscape.

Industry experts and economists have mixed opinions about the potential impacts of a Trump re-election. Some argue that his business-friendly policies would continue to bolster the stock market, while others caution that his unpredictable style and potential for escalating trade conflicts could deter investment and growth.

Ian Bremmer, a political scientist and president of Eurasia Group, suggests that while markets generally favor the certainty and stability associated with established economic policies, Trump’s approach can often lead to sudden shifts that could either be highly beneficial or detrimental, depending on the context and execution. This dual-edged nature makes the prospect of Trump’s second term a significant point of contention and interest among market participants.