What can investors expect from Trump 2.0?

During Donald Trump’s first term in office, the S&P 500 rose 14% per year. Under Joe Biden it rose by a remarkably similar 15% per year. And yet during those eight years we had corporate tax cuts, tariffs and a Chinese trade war, Covid, war in Ukraine, war in the Middle East, inflation of over 8%, inflation of close to 0% and oil prices below $0 and above $100¹.

What does this tell us? Perhaps that while there is no doubt that this election will have a real impact on different areas of the economy, the effect of politics on the overall market is difficult to predict. So far, the market has taken the positives from Trump’s win and run with them. The prospect of lower taxes, government efficiency programmes and increasing M&A are all front of mind. Animal spirits are running high. This has been evidenced by a resurgence in small business confidence, which rose strongly on Trump’s first election win in 2016 and has done so again.

US small business confidence

NFIB small business optimism index

In rather fortuitous timing, I have recently read Walter Isaacson’s biography of Elon Musk. Whatever you may think of his politics, it’s hard to refute that Musk has had an extraordinary career as an entrepreneur. Reading his biography, what I was most struck by was Musk’s questioning of excessive regulations, the desire to bring down costs and his relentless drive to make improvements, often with seemingly impossible deadlines.

This has worked for Musk in the private sector, most notably with the success of Space X and Tesla. Now he is going to attempt to replicate this in government in his new role – together with Vivek Ramaswamy – as co-leader of the Department of Government Efficiency (DOGE). Trump and his vice-president Vance have called it the “Manhattan Project of our time”.

Why does this matter to investors? Government spending is $6 trillion a year². A reduction in this would help the government debt burden and – importantly – any changes in how the $6 trillion is spent will have widespread ramifications. Contentious areas include: defence companies with cost plus contracts; consultants expensing the government with few checks or balances; subsidies to autos and renewables; Medicare having literally thousands of different prices for a particular drug; administrative costs across vast areas of the economy.

Of course the DOGE will not be given a smooth ride by the Democrats. And the super egos of Trump and Musk may not be able to co-exist for long. But we are looking forward to the DOGE shedding light on the rampant government waste which so many company executives complain about. The historic lack of accountability is likely to expose plenty of usurious players. Which will in turn provide us with plenty of opportunities on the short side in the companies affected.

American exceptionalism and the deficit

The narrative of ‘American Exceptionalism’ seems to have stepped up recently. The US’s combination of enjoying higher GDP growth, being the centre of AI innovation, having enormous fiscal spending programmes and vast energy resources continues to fuel the fire. The one area that market prognosticators tend to be concerned about is the fiscal deficit, running at 6% of GDP³.

While the campaign trail was dominated (on both sides) by promises of more fiscal spending and continued huge deficits, we would highlight two key developments which suggest the contrary.

The first is the establishment of the DOGE, with the sole purpose of cutting or rationalising government spending and reducing red tape. Second, we think Scott Bessent’s appointment as Treasury Secretary is significant. Clearly, having worked for George Soros and Stanley Druckenmiller, he knows a thing or two about global macroeconomics. Bessent was also an admirer of Japan’s Shinzo Abe and his ‘Three Arrows’ policy which was designed to ramp up monetary and fiscal policy alongside structural reform.

Bessent has been pitching a ‘3-3-3’ plan to reduce the budget deficit while boosting growth and energy production. This would involve 3% GDP growth, a budget deficit of 3% of GDP and the production of three million more barrels of oil per day. None of those are particularly easy to do, but we think the idea of a runaway deficit under Trump is looking much less likely given the DOGE and the incoming Treasury Secretary.

Deregulation creating positive environment for financials

No area has been more impacted by the increase in bureaucracy and red tape in recent years than financials. From uncertainty over capital requirements for large banks through to a hostile environment for M&A, many management teams have complained how regulations had stifled their customers’ ability to make long-term decisions.

The hope is that a shift to de-regulation will improve banks’ capital positions, accelerate loan growth, remove onerous compliance costs, and perhaps most impactfully, lead to a recovery in depressed capital markets, where IPO and acquisition activity levels have been very depressed. In the fund we were overweight financials ahead of the election and we have since added to the position. We have a broad range of holdings including auto insurance, insurance brokerage, payments, credit cards and banks.

But expect volatility…

While we have highlighted the many positives that investors can take from Trump’s election, clearly there are also risks. We know from Trump 1.0 to expect a lot of uncertainty. Tariffs are seen as the most disruptive policy risk. Time will tell if the rhetoric becomes reality, but we should not forget that in 2018 they led to an industrial recession. We will also find it fascinating to monitor if the clash of egos in the Trump team can work together for long enough to fulfil their ambitions.