Republicans taking over majority leadership in the Senate and holding onto the House with the narrowest majority in the history of the Republican party. So it would be appropriate to highlight the potential policy mistakes that could undermine our otherwise bullish policy outlook for 2025.
In general, lower taxes, deregulation, higher fiscal deficits, and lower interest rates are all policies that tend to have a positive impact on corporate profits, which in turn support stock gains.
Risk 1: The Federal Reserve Keeps Policy Too Tight
The first risk is not related to the Trump administration or Congress at all, but rather the possibility that the Federal Reserve keeps monetary policy too tight. The Fed is currently in a rate cutting regime, but expectations of the pace of rate cuts have slowed quite a bit.
Risk 2: Tariffs Push Inflation Higher
There has been a lot of speculation about tariff policy but expectation is the Trump administration will have some sensitivity to the potential impact on inflation and will keep tariffs at least somewhat targeted.
Risk 3: Internal Division
This is a policy risk that has a positive side. During recent election the markets tend to like mixed government. But we won’t have mixed government in 2025. Republicans will hold narrow majorities in both the House and Senate. As of inauguration day on January 20, we’ll also have a Republican president in the Oval Office.
The majorities will be narrow.
Risk 4: Deregulation
It may make deregulation under the new Trump administration less robust than markets expect in places.
Risk 5: Immigration Policy
In my view, this is the most underrated risk but still secondary only to tariffs and monetary policy when it comes to the absolute level of risk. Clearly there are some genuine problems with current immigration policy. But the extent to which the resilience of the US economy depends on its ability to attract and absorb global labor is often underestimated. Immigration reform is a positive goal, but also comes with some risks. How high those risks are depends on actual policy. It would take a fairly large mistake to have enough of an impact on the economy to weigh on markets, but the potential for a large mistake is non-trivial.
Risk 6: Unpredictability
Unpredictability is part of Trump’s mojo and he is capable of deploying it very effectively. But while unpredictability can be powerful when negotiating, it can create a difficult environment for businesses. Companies put a lot of capital at risk based on expectations of future profits, and generally want policy clarity. An uncertain policy environment can make it harder to do business, although sometimes it does also present opportunities. I would only view this is as a small risk.
Risk 7: Fed Independence
I would consider this a very small risk, but with the consequences of a misstep potentially large. Trump will try to put pressure on the Federal Reserve to lower rates as soon as he takes office. That in and of itself isn’t a problem. There are mechanisms that help maintain Fed independence. But a genuine threat to Fed independence that cannot be walked back could be a problem.
Finally to summarize on the risks – Donald Trump was elected to be a disruptor, and while disruption can be valuable, it can also often come with unintended consequences.
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