There has been a lot of speculation of how a second Trump term will affect the economy. Similar to his first term, I am bullish on the stock market and fully-invested. Here are my thoughts.
1. Deficits will surge, but it won’t be a big deal for investors. The stock market will keep going up due to strong profits and earnings, buoyed by tax cuts.
2. The Trump tax cuts will not pay for themselves–they never have–but this does not matter. They will inflate stock prices and boost GDP to some extent nonetheless. Tax cuts will have an inflationary effect on many asset classes, such as stocks and real estate. For that reason I remain invested.
3. Inflation will go up or remain high despite tariffs or other promises. Investors will make money nonetheless, which is why I remain invested. A 5% year-over-year gain of CPI is immaterial compared to 25-30% annual returns for the S&P 500 and Nasdaq 100, which is what I am predicting for the next 4 years under Trump.
Trump does not have the power to lower inflation. The only way inflation falls a lot is if there is some sort of recession, like Covid or the 2008 banking crisis. Reducing inflation and deficits can also be achieved by broad tax hikes, but as George Herbert-Walker Bush learned the hard way, this is a political non-starter.
4. Tariffs will not reduce deficit spending much. Much of America’s deficit spending is from government spending (e.g. defense and healthcare), not imports. From CNBC:
The other is to generate revenue for the U.S. government. The nonpartisan Tax Foundation estimates that a 10% universal tariff would raise $2 trillion in revenue for the federal government from 2025 through 2034, and a 20% tariff would raise $3.3 trillion.
That’s quite a bit of money in raw terms, but not enough to cover the revenue shortfall that would result from making the tax cuts from the 2017 Tax Cuts and Jobs Act permanent, the Tax Foundation found.
$2 trillion of extra revenue over a decade from tariffs amounts to only $200 billion/year, which is only 10% of the annual budget for healthcare alone. Medicare, Medicaid, and Obamacare subsidies amount to around $2 trillion annually.
5. Trump will not do much if anything to help Bitcoin. All you have to do is look at his track record. He appoints smart people and then cannot execute on anything either because those appointees quit, or he becomes unfocused/distracted, or his proposals are simply unworkable. There will be no Bitcoin strategic reserve unless it gets the necessary votes, which seems unlikely given that many Republicans still oppose or ambivalent about Bitcoin. It’s impossible to restrict Bitcoin mining to the U.S. owing to Bitcoin’s decentralized nature.
Trump has never been good at policy. He likes the idea of being in power and the public adoration that comes with it, more than the difficult process of negotiating legislation or persuading skeptics to his side.
It’s the same as in 2016: despite surrounding himself with out-of-box thinkers (e.g. Peter Thiel), he accomplished close to nothing except the tax cuts, which even mainstream Republicans can pass. People vastly overestimate the power of money in politics. Just because Bitcoin people donate a lot does not mean they will have much sway as far as policy goes.
6. Trump will try to cozy up to Meta, Google, and Amazon. Trump does not hate big tech as much as commonly assumed. Trump knows that Silicon Valley is at the heart of America’s economic dominance and does not want to ignore it.
7. A couple of bloggers who I follow were pushing the ‘Jd Vance weird‘ narrative or thought it was a good strategy or had stickiness in the minds of voters; if this was you, step back and revise your priors. The political attack utterly failed.
For example, Richard Hanania in September floated this theory that voters do not like intellectuals to explain what he perceived as the apparent popularity of Tim Walz and dislike of Trump and Vance, which in hindsight was wrong:
Why are Trump and Vance so widely disliked? Why has Kamala seen her approval numbers go up so quickly since Biden stepped aside? And why has Tim Walz managed to be the only individual on either ticket who has been consistently viewed positively throughout the campaign?
Some answers to these questions are obvious. Trump is Trump, and Vance has said extremely unappealing things about women. Yet one thing that gets overlooked in comparing Vance, Kamala, and Walz is that the American public really doesn’t like intellectuals.
I was never under the impression Walz was considered that popular. Much of the positive media coverage was from the process and relief of Biden stepping down, not that Harris and Walz were especially good candidates.