S&P 500 And The Trump First 100 Days

Trump Tariffs, Trade Wars And Deregulation

In 2017, the new president of the United States, Donald Trump, took office on a platform of tariffs, trade wars, onshoring, and tax cuts.

In 2017, the dollar was strong, bond yields were elevated, and global liquidity and M2 were weak. The dollar’s strength contributed to the weak global liquidity, making it more expensive for other countries to borrow in dollars.

In his first year in office, Donald Trump took steps to weaken the dollar and inject liquidity into the global system.

The next president of the United States is inaugurated today.

Donald Trump was elected again on a ticket of tariffs, trade war, tax cuts and deregulation.

He enters office with a strong dollar, elevated bond yields and weak global liquidity.

While the dollar’s strength may partly reflect concerns over the new Trump administration and uncertainty regarding tariffs, it’s not the only factor driving the strong dollar.

Trump And A Strong Dollar

The dollar is structurally strong because 50% of world debt is in dollars. The U.S. has been removing liquidity from the system, creating a shortage of dollars, which drives the dollar’s value higher.

Trump wants to increase U.S. exports. That requires stimulation in the global economy, specifically within the Chinese economy. However, China can’t stimulate the economy because the dollar’s strength would risk breaking the yuan peg. That was the same scenario in 2017.

Trump has not changed his stance on the dollar. A strong dollar lowers economic growth. Trump wants a weaker dollar.

Last week, Trump blamed the Biden administration for high interest rates. The blame game will likely continue, providing Trump with cover to allow the dollar to maintain strength while he conducts trade and tariff negotiations.

Trump Trade And Tariff Negotiations

The strong dollar will be used as a carrot and stick in trade and tariff negotiations.

If countries play ball, the U.S. will lower the dollar, inject liquidity into the dollar system and stimulate the global economy.

How will it likely play out in the S&P 500 in the short term?

A strong dollar lowers economic growth. The lead time is around two months.

Expect the U.S. economy to slow down in the first quarter and impact forward growth expectations.

S&P 500 Faces Uncertainty

The S&P 500 may struggle amid uncertainty regarding the size, sequence, and scope of the Trump administration’s changes to fiscal and regulatory policy. Negative shocks from tariffs may occur before positive shocks from tax cuts, deregulation, and accelerated energy production.

Our instinct is that the S&P 500 will be choppy in the first quarter and likely experience a significant correction in the first quarter or early in the second quarter.

Click on the Journal link below to read more about the factors currently driving the economy, the stock market and Bitcoin.

Link: JOURNAL