Drowning out the noise
Drowning out the noise
Earlier this week saw Donald Trump inaugurated as 47th US President marking his second term, over 2 months since the result of the presidential election was announced. Hours after taking the oath of office, Trump issued a flurry of executive orders, some of which could face legal challenges. Executive orders are directives that guide the actions of federal agencies. They are not legislation, and many of Trump’s orders may get contested in court. Despite this, they can be seen as an early manifesto.
With the first week of Trump’s presidency coming to a close, we thought it would be pertinent to take stock following our note in September (The Final Countdown - 40 days to go — Artorius) and evaluate the landscape.
Trump Tariff 2.0
One of Trump’s first acts was to reverse President Obama’s decision to rename America’s highest peak from Mount McKinley to Denali, its ancient name. Avid fans of US politics will know William McKinley as the 25th US president, serving from 1897 until his assassination in 1901. McKinley was largely known for his love of tariffs (and for expanding American territory during the aftermath of the Spanish-American War). Trump’s seeming admiration for McKinley may give an insight into the inspiration for the tactics to be used in his second term.
Trump is a genuine fan of tariffs and views them as a great negotiation tool and income generator. Nevertheless, how his rhetoric translates into tangible policies is crucial for investor confidence. Trump has signalled numerous times that he wants to tackle inflation so an aggressive wave of tariffs could be counterproductive in that sense. Although he has a history of being aggressive with trade policy, it is important to note that the US economic landscape is very different from his first presidency in 2017. Deflation was a real fear then. A key hallmark of his recent election campaign was to highlight the elevated levels of inflation experienced since the pandemic, which had led to the reduction in purchasing power of the US consumer.
From a market perspective, tariffs were the policy that had investors most concerned in the run-up to Trump 2.0. As discussed in our investment comment back in August, Talking Tariffs — Artorius, tariffs imposed on trade partners have the potential for significant inflationary effects depending on the scale imposed.
Investors were bracing for fast announcements and slow implementation on this topic. Trump wasted no time in threatening Mexico and Canada with tariffs of 25% on imports on his first day in office, potentially coming into effect as early as February 1st. Mexico and Canada are two of the United States’ biggest trading partners, accounting for 30% of total imports. However, when looking at currency moves, it seems that currency traders are betting on Trump’s bark being worse than his bite. The US dollar dropped against its Canadian cousin in response to leaks on Trump’s first day in office that there would be no new tariffs at first, then subsequently surged when Trump announced the new 25% tariff plan. It has steadily slipped since. One could argue that the US dollar has been overvalued and entered the year reliant on Trump 2.0 tariffs being enacted to maintain its strength.
During his election campaign, proposed tariffs towards Chinese imports had been floated by Trump to be as high as 60% and there were reports he was considering declaring a national economic emergency to allow these new tariffs. The declaration would allow Trump to construct a new tariff program by using the International Economic Emergency Powers Act, known as “IEEPA,” which unilaterally authorises a president to manage imports during a national emergency. Such move has not been forthcoming, and the 60% figure has been seemingly downgraded by the President to just 10%. Whilst any increase in tariffs is expected to lead to inflationary price rises in the US, as ever, the devil lies in the detail. For example, a terminal tariff rate (the fee paid to a freight terminal operator for loading and unloading cargo) would be viewed differently to a focus on intermediate goods (products used to make other products/services) or electronics. US market champions such as Apple operate in the electronics space so would be negatively affected by any punitive cost increases.
The Magnificent?
The inauguration featured some of Silicon Valley’s biggest CEOs, all seemingly with the desire to get into Trump’s good graces, which is in contrast to the arm’s length relationship seen during his first term in office. Many had better seats during the ceremony than Trump’s own cabinet members, emphasising the cozy relationship between the new administration and the ultra-wealthy.
Due to renewed optimism in the back end of 2024, the S&P 500 recorded the best back-to-back annual gains since the late 1990s. More specifically, the ‘Magnificent 7’ has generated roughly 60% of the S&P 500’s market return over the past two years and a key focus for investors is whether this domination of the mega tech names will continue in 2025. Nevertheless, the ‘Mag 7’ have been underperforming since Christmas relative to other large-cap US stocks, aside from a good day earlier this week following Trump’s AI announcement, noted below. Investors have been uneasy with the concentration risk of the S&P 500 and the broadening out of US stock market performance may help portfolio managers sleep easier.
Magnificent Seven price index/US large-caps ex-Magnificent Seven
Source: Artorius, Bloomberg
The above chart shows the ratio between the Magnificent 7 companies and the other 493 companies in the S&P 500. A high ratio represents the Mag 7 companies outperforming the others but as shown, this trend has been bucked over the last month.
Optimism has been renewed following Trump’s announcement on Tuesday of an AI joint infrastructure venture between tech companies SoftBank, OpenAI and Oracle named ‘Stargate’. This has been dubbed the ‘largest AI infrastructure project in history’ which is estimated to be worth $500 billion over the next four years. The US already has more data centres than in all other major countries combined and the first phase of this project aims to further expand on this figure. Time will tell whether this project has the desired effects, but it is evident that Trump is seeking to further capitalise on the US’ leadership in the Artificial Intelligence space. Concerns remain regarding the resources needed to power the infrastructure and data centres needed for AI companies. Trump is keen to reduce the reliance on overseas energy, somewhat explaining his ambitions to embark on a new age of oil and gas exploration. This also ties in with Trump’s audacious plans to buy Greenland, an island rich in oil and gas along with rare earth metals and minerals, with strategic geographical importance to the U.S.
Conclusion
In other news, Trump has left the Paris Climate Accord (again), restrictions on oil drilling are being lifted and plans have been put in place to end birthright citizenship in the US. The latter would mean automatic American citizenship currently granted to anyone born in the country would cease. It remains unclear how he intends to achieve this, given that birthright citizenship is enshrined in the US Constitution and would require two-thirds majority vote in Congress to formalise.
Similar to the first week of Trump’s first presidency back in 2017, investors can be forgiven for feeling inundated with information and uncertainty on whether speculation will lead to policy enactment. Investors are reminded to filter out the daily noise and focus on the long-term economic impacts.
Yuval Peshchanitsky
Portfolio Analyst
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All expressions of opinion reflect the judgment of Artorius at 24th January 2025 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.
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