Donald Trump’s first term as U.S. President was marked by a robust economy, a business-friendly tax regime and ample opportunities for investors. This time around, with a Republican election sweep of the White House and Congress, he has a stronger mandate, a broad agenda, and an intention to hit the ground running to implement it.
U.S. equity markets responded enthusiastically to Trump’s convincing victory, with all three major indexes closing at record highs the day after the Nov. 5 vote. It was a different story, however, in the bond market, which swooned after the Republican win on concerns that the President-elect’s low-tax, pro-tariff policies, if implemented, could spark a new bout of inflation.
Campaign promises are not policies, of course, but it is not too early to assess the likely risks and opportunities for investors under a second Trump presidency. We asked three experts to weigh in on the market reaction, the longer-term outlook—and the prospect of rekindled inflationary fires if the new administration pushes certain policies too hard, too soon.
What does the Trump Bump in stock markets really mean?
“Trump is generally viewed as more economy-friendly than Kamala Harris,” says Scott Blair, chief investment officer with CWB Wealth. “A good reason for this ‘Trump Bump’ is that the corporate tax cuts enacted during his first term were scheduled to lapse, and it’s reasonable to believe that Harris would have allowed those rates to rise. The market is driven by corporate earnings, so there’s a general sense of relief that Trump will extend those cuts.”
Philip Petursson, chief investment strategist at IG Wealth Management, agrees that a continuation of corporate tax cuts is part of the reason for enthusiasm—paired with a general sense of relief that the election is over and that markets have found direction.
“We’ve seen it happen over and over that November and December following a U.S. election tend to be strong months,” he says. “Once we remove the uncertainty of the unknown, regardless of the victor, the markets go up at a rate well above average.”
He notes, however, that this bump may have begun well before the election. The months that followed Trump’s election in 2016 allayed fears that his presidency would have a negative effect on the investment climate. So, says Petursson, he came into the 2024 election as a known quantity, and markets were already optimistic about an anticipated Trump victory.
“I believe investors were getting ahead of that in September and October as we saw markets go up when they usually go down,” he says. “I think the market was already pricing in a high probability of a Trump win.”
Saurin Patel, associate professor of finance, Richard Ivey School of Business, at Western University, notes that the Trump bump has bypassed sectors that rely on subsidies and regulation.
“Companies in the clean energy sector and the EV sector are already seeing a downward trend—with the exception of Tesla, which seems to be an outlier,” he says. (Tesla CEO Elon Musk, of course, was an ardent Trump supporter during the campaign, and the President-elect has already pegged him to help lead a newly created Department of Government Efficiency.)
Petursson says he expects stocks to continue to rise under Trump, but not at the same pace they did during his first term.
“We anticipate a decent economic backdrop for corporate profits to continue to grow, but we have to weigh that against valuation,” he says. “This is where the administration really doesn’t have any sway. Stocks were significantly cheaper in 2016, and interest rates and inflation were meaningfully lower. Today, stocks are quite expensive, long-term interest rates are higher, and inflation isn’t one per cent. I think we’ll see positive markets, but more likely in the mid-single digits.”
Tariff risks and opportunities
Trump’s promises to impose tariffs remains a wild card for stocks. Their impact depends on the degree to which he can impose them through executive order, and their size.
Blair believes that a 10 per cent across-the-board tariff on imports would have a dramatic effect on both the U.S. and global economies and stoke inflation domestically.
“In that environment, we’d expect to see small-cap U.S. stocks perform well, because they tend to be really driven by the U.S. economy,” he says. “If businesses and manufacturing are coming back to the U.S., that will be a positive for those smaller companies, as opposed to large caps, which have a lot of exposure globally.”
Patel also sees such tariffs as inflationary for the U.S., particularly in areas, such as foreign-sourced building materials, where domestic production can’t quickly take up the slack.
Ultimately, he sees a high-tariff regime, even tariffs directly targeting only China, reflected in overall rising inflation and higher interest rates. If additional tax cuts are contemplated without addressing deficits, those rates would only increase.
“The winner in that scenario would be banking stocks,” Patel says.
He sees the potential for rallies in sectors such as banking or cryptocurrency, where an anticipated relaxation of regulations may boost profits.
Both Blair and Patel say that policies promoting oil and gas production domestically as having a dual effect, boosting activity in the energy sector stocks while depressing oil and gas prices due to increased production.
“We expect that the U.S. will not be hostile to the Canadian energy sector,” Blair says. “But the same mixed bag of increased activity and downward price pressure would apply to Canadian energy companies as well.”
Seeking global diversification
Blair notes that the U.S. economy is currently performing well, at least compared to its global counterparts.
“Even with the U.S. market hitting an all-time high, we’re not thinking that it’s in for an imminent correction,” he says. “But other markets are cheaper, so it’s a good time to seek diversity in stocks from international markets that are looking a lot more reasonably priced. Global diversification seems to be to us a smart idea.”
Mixed news for bond investors
Patel sees Trump policies from tariffs to tax cuts as potentially inflationary, and that scenario puts pressure on bond yields.
Blair agrees.
“We’ve seen 10-year [yields] move up really rapidly over the last two months,” he says. “Under the Trump agenda, we may even see deficits higher than they would have been under Harris. The bond market is signalling with this move higher that there’s worry about unsustainable deficits and about inflation returning.”
Petursson, however, sees Trump policies as modestly inflationary, between 2.5 and 3.5 per cent, even with the imposition of some tariffs.
“It’s likely to slow the pace of the Federal Reserve rate cuts, and likely to keep long-term interest rates at current levels, if not a little bit higher than where we are,” he says. “That’s actually a decent thing for bond investors. Getting into the fixed income market with yields of five per cent is quite attractive.”
Caution on the Canadian dollar
With the U.S. economy outpacing Canada’s and inflationary pressures south of the border keeping rates there higher, both Patel and Petursson see the Canadian dollar moving lower.
“If you hold U.S. dollar-denominated securities, you’re going to get a bit of a bump in return from the U.S. dollar appreciating relative to Canadian currency,” Petursson says.
A role for gold?
Blair notes that gold remains a safe haven against volatility over the long term.
“Donald Trump has become almost synonymous with volatility,” he says. “If you’re concerned about geopolitics and unsure about Trump, holding a little gold is not a bad idea.”
Petursson notes that IG Wealth Management has been bullish on gold in recent years.
“You have to be patient with gold,” he says. “Its price can move around, but eventually it finds its fair value. I would say that’s roughly where we are today. If you look at where we’re at, in terms of rate, deficit and inflation environments, I don’t think it’s done in terms of this rally. If we get to the $3,000 level, we’ll re-evaluate.”
The private market buffer
Petursson notes that private markets continue to offer stability, even in an uncertain policy environment.
“We have the belief that over the long term, private assets, be it credit or equity, have the characteristics of lowering overall volatility on portfolios and enhancing returns,” he says. “It’s a long-term strategy and it’s not subject to the whims of political or monetary policy. It’s based on the fundamentals of each and every business. They tend to be better investments that reward you over the long term.”
Final thoughts?
Blair notes that investors may get too wrapped up in presidents, parties and policies to appreciate a broader view.
“We had great markets under Trump and we had great markets under Biden,” he says. “We tend to worry a lot about what may happen, but the U.S. economy is really resilient and remains the envy of the world. Trump could make changes to tariff rules or increase deportations, but this is still a country where you want to keep at least some of your portfolio.”
Petursson says he agrees that investors should leave their political concerns out of the investing arena.
“Mixing political views and personal beliefs with market views often tends to be the wrong approach,” he says. “We advise investors to take the political environment with a massive grain of salt, wait for the actual policy, and then re-evaluate.”
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