New Administration, Economic Policies, & Markets
Activity came out of the White House at a feverish pace during the first week of the new administration. Headlines swirling nonstop with dizzying executive orders have been the norm, not to mention talks of tariffs.
With the unknown impact of potential tariffs on financial markets and new developments that could affect markets in the future, we thought now would be a good time to reach out and share what we can surmise at this early stage.
Once Upon a Tariff
Long before executive orders started rolling out, many were concerned about tariffs and their potential economic impact. Tariffs are nothing new, and their impact is debatable. After all, most of the tariffs enacted in 2018 remained in place for the last four years.
But now, additional tariffs are the focus, with talks of a Feb. 1st start date. The most recent chatter is 10% on China and 25% on Mexico/Canada. Beer and French fries could suffer! But seriously, the Canadian tariff effects could be felt by U.S. consumers in automobiles and other products. Plenty of U.S.-bound auto manufacturing happens there.
Hedging Tariffs (If Necessary?)
The consensus has been that tariffs could contribute to higher interest rates, a rising dollar, upward pressure on inflation, and higher prices for imported goods.
We saw the U.S. dollar rise along with interest rates in the months leading up to the election.
Some say that domestic manufacturing could benefit (big tech included). Other manufacturers could move operations away from China, potentially increasing American jobs.
On the flip side, tariffs could raise the prices of goods and services, and consumers could end up footing the bill with inflation already high. Time will tell.
It is worth noting that these tariffs could help generate revenue for the government, which is crucial given the size of deficit.
Deregulation & Energy
Deregulation and energy — two big talking points as the new administration takes form. We have seen one potential deregulation benefactor shine in recent days via positive bank earnings, with dealmaking a big contributor. Perhaps this variety of action could be a harbinger of things to come.
On the energy front, we have the executive order titled “Unleashing American Energy,” which aims to bring down American energy prices, build domestic energy reserves, and export U.S. energy worldwide. The initiative is in its nascence and leaves plenty of food for thought.
Cost of Living Crisis Order
Dozens of executive orders were signed during the first week, including one on inflation. The measure aims to deliver emergency price relief to American families amid the cost-of-living crisis.
Details on this measure are scant in this early part of the process, but general actions outlined included: “lower the cost of housing and expand housing supply; eliminate unnecessary administrative expenses and rent-seeking practices.”
The execution specifics are open to interpretation. However, it has been mandated that the leaders of all executive departments and agencies provide emergency price relief. The effectiveness of this measure will be evaluated through monthly reports, ensuring some level of accountability.
Trump, Powell Match-Up
The dynamic duo of Trump and Powell do not have the best history. It’s likely they’ll continue to butt heads in 2025. Naturally, the president will want lower rates to keep the economic juices flowing — but Houston, we have an inflation problem!
If some of the current policy changes achieve their intended effects, the inflation rate could decrease toward the Fed's 2% annual growth target. But inflation has been sticky lately.
Given the spending and inflation trends since COVID, can we return to the Fed's 2% target anytime soon? Will some more folks talk about 2.5% or 3.0% being the new normal?
The Takeaway
Change is unavoidable, and numerous variables are in play as the new administration begins. Some forms of tariffs on China should be expected to be enacted, likely on February 1st.
What does it mean for investment portfolios? Staying diversified is the first tool many successful long-term investors gainfully employ. Another idea for the present time is to consider some of the domestically protected industries that could potentially benefit from deregulation and tariffs. Big bank earnings have been exceptionally strong so far this season.
Of course, it is very early, with all the new initiatives only in their nascence. It will be beneficial to analyze developments as they occur, and we will be sure to communicate with you when changes happen.
In the meantime, if you have any questions or needs, please feel free to reach out to us. We are always here as a resource for you!
Sources:
https://www.whitehouse.gov/presidential-actions/2025/01/unleashing-american-energy/
