With a second Trump term at least partially reflected in the price of global markets, we focus on two key debates for the longer-term: Potential tariffs and fiscal policy. 

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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast – some initial thoughts on the market implications of a second term for President Trump.

It’s Wednesday, Nov 6, at 2pm in New York.

As it became clearer on election night that Former President Trump was set to win a second term in the White House, markets began to price in the expected impacts of resulting public policy choices. The US dollar rallied, which makes sense when you consider that President Trump has argued for higher tariffs, something that could hurt rest of world growth more than the US.  

US Treasuries sold off and yield rose, something that makes sense given President Trump supports tax policy choices that could meaningfully expand deficits. And US equity markets rallied led by key sectors that could benefit fundamentally from extended tax breaks and deregulation, including industrials and energy. 

But with a second Trump term now at least partially reflected in the price of markets across assets, it gets harder from here to understand how markets move.  There’s several key debates we’ll be tracking, here’s two that are top of mind. 

First, how will tariffs be implemented? Per the work of our economists, higher tariffs can raise inflation and crimp growth. They estimated that a blanket 10 per cent tariffs and 60 per cent tariffs on China imports would raise inflation by 1 per cent and dampen GDP growth by 1.4 per cent. Some pretty big numbers that would really challenge the soft-landing narrative and positive backdrop for equities and other riskier assets. Other approaches may carry the same risks, but to a lesser degree. Tariffs exercised via executive authority would, in our view, likely have to be targeted to countries and products – as opposed to implemented on a blanket basis. So, the approach to tariffs could represent a substantial difference in the outlook for markets. 

Second, how quickly and to what degree might US deficits expand? Our presumption has been that fiscal policy action, regardless of US election outcome, wouldn’t become clear until late 2025, largely governed by the need to address several provisions from the Tax Cuts and Jobs Act that expire at the end of that year. But, while not our base case it's of course possible that a Republican Congressional majority could deliver on tax cuts earlier – and perhaps even in larger size. The resolution to this debate could make the difference between yields climbing even higher than they have recently and taking a pause at these levels. 

Bottom line, as the election ends and the Presidential transition begins, there’s a lot about policy implementation that we can learn to guide our market strategy. We’ll be paying attention to all the key policymaker statements and deliberations, and feed through the signal to you.

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