The Tale Of Two Markets: Inflation Expectations And The Trump Administration's Policies – JP
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As the Trump administration prepares to take office in 2025, investors and policymakers grapple with various factors that could shape inflation expectations. The interplay of immigration policy, deregulation, energy production, tariffs, and taxes will be critical in determining price trajectories.
The planned border closure and crackdown on illegal immigration could lead to labor shortages and upward pressure on wages and prices. However, deporting or taxing undocumented migrants could ease the fiscal burden on government budgets, potentially offsetting some inflationary effects.
The administration’s efforts to deregulate the economy may spur growth and boost corporate profitability but could also lead to higher prices as businesses adapt to the new regulatory environment. Increased energy production and lower oil prices could dampen inflation but may be limited by strong economic growth and increased demand.
Despite the Fed funds rate lowering by 1%, the 10-year Treasury rate has increased by 1%, likely keeping mortgage rates high and putting pressure on the real estate market. Insurance and property tax rates, not included in the CPI, could give Federal Reserve Chairman Powell an excuse to raise rates further, potentially leading to a recession.
The inflation outlook will depend on how the Federal Reserve responds to these policy initiatives. If Powell takes a more hawkish stance on monetary policy, it could lead to higher interest rates and slower economic growth, putting downward pressure on inflation but increasing the risk of a recession.
Inflation will also depend on how the Federal Reserve responds to these policy initiatives. If Fed Chairman Jerome Powell, who has shown himself to be blatantly political through his support of the Biden/Harris Administration via a 1% reduction in the Fed funds rate, decides to take a more hawkish stance on monetary policy to undermine the Trump administration’s economic agenda, it could lead to higher interest rates and slower economic growth and in turn a downward pressure on inflation and increase the risk of a recession.
Investors and businesses must closely monitor developments and adjust their strategies accordingly. The potential for a resurgence in American industry and a shift toward nationalist policies could create opportunities for investors who can navigate the changing landscape. Still, the path forward may be rocky due to opposition from entrenched interests and potential political and economic volatility.
The inverted yield curve under the Biden Administration has now normalized in anticipation of the Trump Administration. The American economy appears to have dodged a major bullet and avoided a severe downturn under Biden as the level of yield curve inversion under Biden has usually meant a downturn or severe recession or worse. We suspect that Biden should blame Trump for creating an American economy so strong as he left office in 2021 that even he could not wreck it. We can also attribute the supposed lack of a recession to factors such as inaccurate or purposely deceptive government reporting of economic data, an on-fire tech surge because of artificial intelligence, and an economy where the top 20% was doing quite well. The bottom 50%, who had a vote, very clearly had a different opinion, resulting in the Trump 47 Administration.
Ultimately, understanding inflation expectations for 2025 will require careful consideration of the interplay between Trump’s policies and various economic forces. The potential for a slowdown or recession appears more likely in the first half of 2025 as investors witness the showdown in DC between MAGA/DOGE versus the entrenched supporters of swamp politics and big government and spending. A minuscule GOP majority in the House of Representatives will make this interplay even more divisive.
As we look ahead to 2025 and beyond, investors and policymakers must stay agile and adaptable in the face of changing economic conditions. While the potential for a resurgence in American industry and a shift toward nationalist policies could create opportunities, the path forward may be rocky due to opposition from entrenched interests and potential political and economic volatility.
Investors may consider various hedging strategies to protect their portfolios and manage risk in an uncertain economic landscape. Aggressive investors (80 to 100% equities or comparable) willing to take on higher levels of risk in pursuit of higher returns may consider using options and futures contracts to hedge their positions. For example, they could use options spreads or straddles on individual stocks or indices to protect against potential downside risk while benefiting from potential upside gains. Alternatively, they could use futures contracts to short specific sectors or markets they believe may underperform.
Moderate-risk investors (60 to 80% equities or comparable) may prefer a more balanced approach to hedging, using a combination of Treasuries, options, and precious metals. They could allocate a portion of their portfolio to U.S. Treasury bonds, which tend to hold their value during market downturns and provide a steady income stream. Additionally, they could use options strategies such as covered calls or protective puts to generate income and protect against potential losses. Investing in precious metals like gold and silver can hedge against inflation and market volatility, as these assets often maintain their value during economic uncertainty.
Conservative investors (50% or less equities or comparable) who prioritize capital preservation and income generation over capital appreciation may hedge their portfolios using Treasuries, high-quality bonds, and dividend-paying stocks. They could allocate a significant portion of their portfolio to U.S. Treasury bonds and high-quality corporate bonds, which provide a steady income stream and tend to be less volatile than stocks. Investing in dividend-paying stocks can also provide a reliable source of income and potential downside protection, as these companies often have strong financial fundamentals and a history of consistent dividend payouts.
Overall, the most effective hedging strategy will depend on an investor’s individual risk tolerance, investment objectives, and market outlook. By carefully considering these factors and using a combination of hedging tools, investors can develop a comprehensive risk management plan to help navigate the complex economic landscape.
The Santa Claus rally, the January indicator, and the first year of a presidential term are all important market indicators that investors often consider when making investment decisions. Additionally, recent tax legislation to be passed by Congress could significantly impact market performance.
Santa Claus Rally: The Santa Claus rally refers to the tendency for the stock market to perform well during the last week of December and the first few trading days of January. This phenomenon is driven by holiday optimism, year-end bonuses being invested, fund managers making final portfolio adjustments, and tax selling. While the Santa Claus rally is not guaranteed, a strong performance during this period can set a positive tone for the market in the coming year.
January Indicator: The January indicator, also known as the “January Barometer,” is based on the idea that the stock market’s performance in January can predict its performance for the rest of the year. According to this theory, if the S&P 500 posts a gain in January, the market will likely end the year with a positive return. Conversely, a negative January return signals a potential down year for the market. While the January indicator has been accurate for many years, it is not infallible, and investors should not rely on it as the sole determinant of their investment strategy.
First Year of a Presidential Term: The first year of a presidential term has historically been a weak period for the stock market, with the S&P 500 experiencing an average gain of just 1.4% since 1933. This underperformance is often attributed to the uncertainty surrounding the new administration’s policies and their potential economic impact. However, the first year of President Trump’s term in 2017 saw the S&P 500 gain 19.4%, suggesting that the historical trend may not always hold true. Trump looks at the stock market as an immediate poll of how his presidency is doing.
Tax Legislation: Congress’s battle to pass tax legislation could significantly impact the stock market. If the legislation results in lower corporate tax rates, it could increase corporate profits and potentially higher stock prices. However, if the legislation leads to higher deficits and increased inflationary pressures, it could harm the market. Failure to hold rates at their current level would also cause the market to tumble.
If there is a pullback in the first half of the year, these indicators could provide valuable insight into how the year may play out. A 10% correction followed by a strong finish by year-end would be considered a healthy market cycle, as it allows for a resetting of valuations and can help prevent market bubble formation.
There is good reason for cautious optimism in the markets. While some pullback may be expected in the first half of the year, the potential for a strong stock market performance is possible, with many market experts predicting that the S&P 500 could reach 7000 by the end of 2025. Both bulls and bears will find ammunition for their investing strategies. As such, investors must stay vigilant and adapt their strategy to navigate the complex economic landscape in the years ahead.