Trump boost at the mercy of inflation and tariffs, although gold likely to surge

People watch television coverage of the US election at an event organised by the US embassy in Ulaanbaatar, the capital of Mongolia. Picture: AFP

The S&P 500 and Nasdaq saw significant gains following Donald Trump’s election victory. This reflects expectations of lower corporate taxes and deregulation which are driving optimism among investors.

Other markets such as gold are also rallying, although one concern is the impact of rising bond yields.

Indeed, markets are also betting on higher inflation, reflected in rising bond yields, or an increase in the cost of money.

In recent weeks, yields on US Treasuries, especially longer-term bonds, have risen sharply and the yield curve is steepening, reflecting expectations of higher inflation and US government debt.

Markets are pricing in a larger US budget deficit given Donald Trump’s fiscal policies are inflationary. They include cutting the corporate tax rate from 21 per cent to 15 per cent, extending 2017 personal tax cuts for all and eliminating US tax on Americans living abroad. Other policies include increasing taxes on buybacks and companies’ foreign income and repealing green tax incentives contained in the Inflation Reduction Act (IRA).

These policies are very costly. The Committee for a Responsible Federal Budget has estimated the cost of Trump’s policies to be $US7.5 trillion over 2026-2035.

The great fear is the US will struggle to service its record level of debt, which could force investors to demand higher bond yields, which have risen sharply in 2024. A related concern is that the US government could resort to the printing press to fund its debt, which would be inflationary and further pressure bond yields.

The Republican “sweep,” whereby it has won the presidency, the House and Senate, makes extending the 2017 tax cuts a near certainty, which will buoy consumer spending. Trump’s corporate tax cuts too are expected to provide energy to equity markets, much like we saw during his first US presidency.

Large-cap US equities may build on their initial gains following the election result, while small-cap stocks could also perform well, benefiting from lower corporate tax rates and potential tariffs being impost on imports.

The US president-elect wants to impose universal tariffs (ranging from 10 per cent to 20 per cent) on all imports, and a much higher tariff – 60 per cent – on all Chinese imports. He wants to revoke China’s “most favoured nation” status and impose further tariffs on certain auto imports.

The Peterson Institute estimates the potential revenue from Trump’s tariffs at $US225bn a year, before factoring in blowback from retaliatory actions from other countries, and such a large amount could not be funded by Trump’s desired tax cuts.

These tariffs could endanger US-China trade and reduce US domestic demand for cheap Chinese imports, eventually leading to lower US and Chinese economic growth.

The other danger in Trump’s tariff plan is the risk that it feeds into inflation and results in a stronger US dollar which removes the effectiveness of the tariffs in the first place (to make US exports more appealing).

Energy is another key part of Trump’s election promises. He favours opening up new land for drilling, offering tax relief for energy companies, and speeding up the approval of permits and pipelines in order to boost oil and gas production to keep energy costs down.

Under Trump’s plan to ramp up energy production, oil and gas companies could potentially grow their revenues even if oil prices go lower, as well as enjoying lower exploration and production costs and lower taxes.

However, keep in mind the facts. The energy sector was, in fact, the worst-performing one during Trump’s first administration. Technology shares rose the most.

The expected benefits for the energy sector may not materialise this time around either. Under Trump, oil and gas companies had poor returns and clean energy and electric vehicle makers did well, and the reverse was true under Biden. These outcomes were the opposite to what was expected based on the respective presidents’ policy agendas.

In both cases, economic conditions and interest rates generally had a bigger impact in determining the “winners” and “losers”, not the preferences of who was in the White House at the time.

Gold, however, is almost certain to be the beneficiary of a Trump government. During Trump’s previous term, gold prices rose significantly, from $US1209 when he took office in January 2017 to $US1839 on his final day in January 2021. That represents a 52 per cent increase over four years.

Underpinning that expectation is that Trump’s policies could boost inflation, interest rates and economic uncertainty, leading more investors to seek safe-haven assets like gold. Conventional wisdom is that Trump’s policies will lead to a higher US dollar, however, he has explicitly stated he will bring the US dollar down. It is possible that greater currency volatility may result.

Concerns too over record levels of US government debt and Trump’s fiscal policies may encourage central banks worldwide to invest even more in gold and diversify away from US Treasuries, which are now sharply falling in price.

David Bassanese is the chief economist at Betashares.