To say 2024 represented a year where nothing turned out as consensus expected would be putting it lightly. In the space of 12-months, President Trump was convicted by a New York jury, survived two assassination attempts, dethroned President Biden, won the presidential election, and rounded it out as Time Magazine’s ‘Person of the Year’.
And yet, as we cast our minds back to Trump’s defeat in the 2020 election, he was virtually consigned to political history and considered persona non grata. However, as markets rallied strongly between the election day and Trump’s second inauguration on 20 January 2025, it shows that lightning can strike twice after all.
Back from the dead
Following Trump’s decisive electoral win, markets have rejoiced around his return to the White House with widespread gains across risk assets. Trump 2.0 is proposing a similar agenda to his first stint in power, with a heavy emphasis on market-friendly and pro-business policies, deregulation, elevated fiscal spending and tax-cuts.
Consequently, the frequent debate between a ‘soft’ versus a ‘hard’ landing in the US economy has been ostensibly resolved in favour of a ‘no-landing’. This is a scenario in which the economy sidesteps a downturn altogether and economic growth remains resilient.
Trump bump
Fuelling this sense of optimism has, in part, been Trump’s proposal to reduce the corporate tax rate from 21% down to 15% for domestic producers, which is equivalent to an extra 4-5% earnings per share growth for US equities. Similarly, the proposal to eliminate 10 regulations for every new one has been warmly welcomed, particularly within the ‘financials’ sector where merger and acquisition activity is poised to rebound.
Trump’s ‘drill baby, drill’ mantra is well-known, with his second term likely to see a meaningful uptick in US oil and natural gas production. This increased production is probably bearish for oil prices, which is expected to have positive flow-on effects for inflation.
Similarly, cuts to climate and environmental agencies and a reduced focus on ESG will slash corporate ‘green tape’, potentially resulting in lower compliance costs.
All this proved to be an intoxicating cocktail for equities – particularly those in the US where the S&P 500 rallied 6.4% in the November election aftermath. Global small caps likewise ran-up 7.2%, with US small caps to benefit the most from the ‘America First’ stance.
Meanwhile, the ASX200 was dragged up with global markets and delivered 3.8%, although all mainstream asset classes paled in comparison to Bitcoin’s 39% surge. This is attributable to Trump’s crypto-friendly stance and interest in creating a strategic bitcoin reserve (note: the below returns are in AUD terms). 
Source: Zenith Investment Partners
Trees don’t grow to the sky
More recently, the market’s attention has shifted to digesting the less market-friendly initiatives, which has seen equities in a holding pattern over the last couple of weeks. Notably, on the campaign trail, a universal tariff of 10-20% on all imports was floated, in addition to 60% tariffs on Chinese imports.
Following the election, Trump set off a trial-balloon threatening an additional 25% tariff on imports from Canada and Mexico, and a further 10% to be levied on China. And although this is likely an intimidation tactic to gain the upper hand in negotiations, some degree of tariffs is assured, likely increasing consumer prices and decreasing GDP.
Source: Zenith Investment Partners
US exceptionalism
A noteworthy ripple-effect of these policies has been the strengthening of the US Dollar (USD), as observed through the US dollar index (DXY) which compares the USD against a composite basket of global currencies. The strengthening USD reflects expectations of lower trade deficits for the US, stronger US economic growth (vis-à-vis less competitive foreign competitors), and subsequently higher interest rates in the US.
Basically, to get a piece of the ‘Trump trade’ investors have sought out ‘greenbacks’ to buy into any asset leveraged to US economic growth.
Aussie dollar under siege
Unfortunately, a casualty of the election has been the Australian dollar which has shed approximately 10% in value. The AUD's decline reflects Australia’s economic vulnerability to China, given they’re our largest trading partner for exports like iron ore and coal. This has led to a snowball effect where falling commodity prices have exerted further downward pressure on the Australian dollar.
Importantly, any trade policies that threaten China’s growth will indirectly impact demand for Australian commodities. Moreover, the US began with significantly higher interest rates than Australia, and with the market now anticipating fewer rate cuts in the US, the resulting widening of interest rate differentials has increased the yield on USD securities, making them more attractive to investors.
Make inflation great again
The prospect of stronger economic growth and fewer interest rate cuts likewise resulted in bond yields surging both in the US and domestically. As a guide, the US 10-year Government bond yield troughed at 3.6% in September in tandem with Trump’s odds of winning the election, and gradually increased to 4.7% at the time of writing. Recall that fixed-rate bond prices and yields move inversely, resulting in bond holders experiencing mark-to-market capital losses.
To date, rising bond yields haven’t punctured the enthusiasm for equities, as the increase has been associated with accelerating economic growth. However, a key risk for markets in 2025 is whether bond yields continue climbing, as at some point, equities will capitulate.
Predictably unpredictable
Trump’s unpredictability is a feature, not a bug – and is key to his negotiations with not only the US congress, but the entire world. Naturally, this makes anticipating a course of action for his administration challenging, and we'd caution against making bold portfolio changes in efforts to front-run these outcomes.
Moving forward, we expect higher levels of volatility as markets adjust to the new political landscape in the US. Importantly, it’s unlikely that the new sheriff in town, Trump, will be any more successful in maintaining fiscal law and order than his predecessor.
And whilst we view inflation as broadly contained, the risks are to the upside with trade barriers and a hardline stance on immigration. There’s also considerable scepticism regarding which policy pillars will be enacted, as notwithstanding the Republican’s clean sweep in the election, their slim majorities will make passing contentious legislation challenging.
Reading the tea leaves
Following back-to-back years of strong market returns, we’re approaching 2025 with an element of caution. Given valuations are elevated, we’ve sought out areas of the market that haven’t rallied as strongly, such as Global Small Caps. Similarly, following the spike in bond yields, we’re looking for opportunities to lock in higher yields for our investors through additional fixed rate bond exposures.
Finally, while the market's AI-fuelled optimism may still have room to run, the likelihood of a third consecutive year of 20%+ returns for U.S. equities feels increasingly unlikely. As history reminds us, lightning may strike twice but counting on a third strike risks inviting thunder.