25 Mar 2025
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Article written by PSK Investment & Research team
The US ushered in Donald Trump for a second term as President on January 20 following the strong mandate he and the Republicans were given at the November 2024 election. That mandate, including key election promises, centred around significant changes to both US domestic and foreign policy. Change of this magnitude does come with risk, particularly in the short-term, and given the weak undercurrents in the US economy that have more recently been patched over by significant government spending and hiring, has culminated in concerns regarding the US (and global) economic outlook which is playing out through equity market weakness.
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Source: Wikipedia
What were Trump’s key election promises?
Donald Trump won the 2024 election with a strong mandate – wining the popular vote, a large win in the electoral college, and sweeping all seven battleground states with wide margins, giving the Republicans the House, the Senate, and the Presidency.
His key election promises resonated with middle America and minority voters. These promises included:
- Border security and immigration
- The economy
- Energy security and independence
- Foreign policy including ending conflict
- Broader domestic policy
- Election reform
What about tariffs?
Whilst tariffs weren’t an election promise per se, they were always going to form a significant leg of his focus on the economy. In particular, repairing the US government’s budget, which is in dire need of repair. More on this shortly.
The prospect of increasing global trade tensions and the use of tariffs had been festering over the last two US presidential terms (Trump, then Biden), where they were used aggressively against China in a bi-partisan approach, then against Russia (sanctions) at the start of the Russia / Ukraine war. Trump had spoken at length about the likely use of tariffs in his presidential campaign so the application of them shouldn’t have been overly surprising to most since his inauguration.
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However, many took the threats of tariffs, particularly on allies, as mere bluster rather than the reality for which Trump has formed. What followed since January 20 was a series of US tariffs with uncertainty as to the finer details, their start dates, and any or no exemptions. This has caused uncertainty at both the household and business level in terms of current and future expenditure and investment. Tariffs to date include:
- Canada & Mexico – 25% tariff on all imports with some exceptions – these are largely bargaining chips to get Canada and Mexico to secure their side of the border with the US
- China – 10% tariff on all imports, then increased to 20% - aimed at attacking China’s trade surplus and stopping the flood of cheap imports into the US
- All countries – aimed at protecting (rebuilding) US industry and equalising (reciprocating) tariffs that have historically been levied by countries against the US
- Steel and aluminium – 25% on all imports
- Agricultural products – 25% on external products
- Autos – 25% on imports
- Semiconductors and Pharmaceuticals – planned at 25% and higher
In addition to the reasons given above for each of the tariffs, the revenue potentially raised by tariffs could be used to assist in repairing the US government’s budget and possibly allow the swifter passage of Trump’s tax cuts.
How bad is the US government's budget position?
The US government debt currently stands at US$37 trillion with government running deficits of US$2 trillion per annum. The cost to service the current debt is almost US$1 trillion per annum. Five years ago, the debt was US$23 trillion and ten years ago it was US$18 trillion.
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Source: EPIC
It’s fair to say this is a fairly large problem in its own right. In addition, the US$2 trillion of annual deficits has multiple issues attached to it:
- Financing it – if the bond market doesn’t play ball, the US government will need to raise debt at higher and higher rates
- Inflationary – spending that level of money is inflationary and doesn’t help the US central bank’s predicament of trying to get interest rates lower
- False economy – that level of spending patches over an otherwise weak economy, so reducing the level of spending to balance the budget may actually result in a recession
Trump, the US Treasury and the US Federal Reserve are trying to manage a very delicate balancing act. Trump wants interest rates lower to help boost the economy and help provide some cost-of-living relief. The US Federal Reserve can’t lower interest rates until inflation is tamed, otherwise there’s a risk of inflation reaccelerating (potentially not helped by tariffs). The US Treasury needs lower bond yields so that they can refinance the debt at lower borrowing rates. The US budget needs repairing so that Trump can deliver on his tax cut promises whilst ensuring essential services can be maintained.
What has unsettled investors of late?
By virtue of trying to repair the budget, including cutting waste and suspected fraud, along with uncertainty regarding tariffs and the strength of the US labour market (deportations, reduction in government workforce), there is a heightened risk of short-term economic pain as the economy transitions away from profligate government spending. Investors are reacting to this concern by largely rotating out of expensive equity names into government bonds and cheaper equity names (valuations back in vogue).
Whilst the overall effect has been weaker equity markets of late, it is pleasing to see investors re-focus their efforts on valuations and company fundamentals as they recalibrate their expectations to the evolving economic and geopolitical backdrop. We still expect a rather productive period ahead, i.e. conditions and concerns will settle, albeit with the froth taken away.
To discuss the impact of the above information on your portfolio, please speak with your PSK adviser.
The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
