Rashaad Tayob, Portfolio Manager at Foord Asset Management

Boom or bust for markets?

Shortly after taking the oath as President, Donald Trump signed a ream of executive orders, wasting no time in taking the reins of American policy. This early influence – combined with a popular mandate and Republican control of Congress and the Senate – suggests that Trump could be even more forceful in pursuing his core policy objectives than he was during his first term.

This is according to Rashaad Tayob, Portfolio Manager at Foord Asset Management, who says Trump’s return to the White House has reignited debate about his “America First” approach and its impact on global markets. “The Trump Trade has undeniably added a fillip to US markets, already trading at all-time highs. However, the broader implications could weigh on US and global economic growth if tariff wars escalate further, or if bond markets fret more about the federal debt burden and bond yields blow out.”

Trump has imposed 25% tariffs on Canada and Mexico, and an additional 10% tariff on Chinese products, which in turn has seen the likes of Canada impose a 25% tariff on the US.

Tayob notes implications would likely be felt far and wide. “In an interconnected global economy, supply chains rarely stop at national borders. Comprehensive tariffs, therefore, risk higher inflation at home, as well as reduced competitiveness for US exporters.”

Immigration: tightening the flow

Under President Biden, immigration surged. This helped to moderate wage inflation by expanding the labour force, yet the social and political backlash reached a tipping point. Voters have demanded a return to stricter border controls and Trump is poised to respond by curbing unskilled immigration significantly.

“In theory, this should add upward pressure on wages, since a smaller labour pool means employers should pay more to attract scarce workers,” explains Tayob. “Rising wages either pressure corporate margins or lead to consumer inflation if businesses pass costs on to consumers. Balancing these inflationary pressures will be a central challenge for Trump’s economic team.”

Growth vs. debt

Trump’s first term unleashed a juggernaut economy supported by tax cuts and higher spending. This came at the cost of burgeoning budget deficits and debt. Now, with the deficit close to 7% of revenue and government debt far higher than it was before the pandemic, there’s limited room for new government stimulus.

“Nonetheless, Trump remains eager to deliver robust growth,” says Tayob. “He is pushing for additional tax cuts while championing aggressive spending plans. With bond yields already nearing 5% on US Treasury bonds maturing in 10 years, interest costs will continue to rise. Already, interest costs account for 19% of US tax revenues. Ever-higher long-bond yields are a major risk to global investment markets, where credit spreads remain tight and risk premiums surprisingly low.”

America First - but how far?

We appear to be reaching peak levels of hype around American exceptionalism. Figures like Donald Trump and Elon Musk excel at promoting this narrative, fostering the perception that the US will dominate across all fronts, from technology to geopolitics. However, such confidence risks obscuring the complexities of global competition and the unintended consequences of a unilateral approach.

“Trump’s focus on domestic economic prosperity aligns with his aversion to costly foreign wars,” says Tayob. “He frequently highlights that international conflicts do not serve American interests, often pointing to the relative peace during his first term. However, recent comments about annexing parts of Canada, Greenland, and the Panama Canal have raised eyebrows. While likely rhetorical, such statements could unsettle markets and heighten geopolitical tension.”

An “America First” stance that alienates neighbours, allies, and trading partners may ultimately undermine US interests by provoking retaliatory measures or reducing global cooperation.

Trump has also weighed in on South Africa’s Land Expropriation laws indicating his lack of fully understanding foreign policies.

Market implications and outlook

The US stock market reacted positively to Trump’s win on optimism for further tax cuts and protection of key industries. However, the market appears to be pricing in a best-case scenario: one in which any trade war remains one sided, with minimal economic fallout.

“US stocks – especially in the tech sector – trade at historically high valuations,” notes Tayob. “In our view, these valuations are not adequately reflecting the downside risks from higher tariffs, rising bond yields and sticky inflation.

“There appears to be too little focus on the downside risks of Donald Trump 2.0. We remain wary and cautious on US stock market valuations and sectors that appear to be in bubble territory,” concludes Tayob.