Donald Trump’s return to the White House brings both market enthusiasm and economic uncertainty. Stocks surged higher following his November victory, capping another strong year for equities - particularly mega-cap tech stocks, which continue to account for the majority of U.S. market performance. In fact, nearly 25% of the market’s gains are attributable to just one such stock.
At the same time, concerns regarding the path of inflation going forward caused the Federal Reserve to revise their interest rate estimates. They now expect only two rate cuts in the coming year, as opposed to four, with short-term rates projected to settle just under 4%. That shift caused longer-term rates to climb, making 2024 another challenging year for many fixed-income investments.
Tariff policies may have a significant effect on the trajectory of inflation, and likely, by extension, interest rates. Most market-watchers expect tariffs to be used more as a bargaining chip rather than implemented across the board in blanket fashion. If it does turn out to be the latter though, it’s hard to see how that won’t result in upward pressure on inflation and ultimately on interest rates.
And tariffs are just the tip of the iceberg. There are a bevy of policy decisions already being implemented in rapid-fire, scatter-shot fashion, with many more to come. From presidential pardons to government spending, the administration has exhibited a preference for expedience over precision, and that could come back to bite them.
Regardless, the stock market remains very optimistic and that optimism has pushed stock market valuations back up to historically very rich levels. Priced for perfection as they now seem to be, any volatility resulting from policy missteps, adverse economic outcomes, or external shocks to the market could be exacerbated.
Meanwhile, given the very slim Republican majorities in the House and the Senate, the President may have a tough time getting everything he wants. He has certainly hit the ground running, but he may also find himself hitting a wall at some point. We will have to wait to see how the market reacts to that and if the optimism turns out to be well-founded or not.
The information above represents the opinion of financial advisor Travis Rus, and is not necessarily that of Raymond James. It is not a complete summary of all available data necessary for making an investment decision and does not constitute a recommendation, nor is it a complete description of the securities, markets, or developments referred to herein. Opinions are subject to change without notice. Information has been obtained from sources considered reliable, but we cannot guarantee that it is accurate or complete. Investing involves risk and you may incur a profit or a loss. Past performance does not guarantee future results.
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