Trump tariffs weigh on positive post-election US market sentiment

Treasury secretary nominee calms investor anxiety while president-elect's trade policies come further into focus before his inauguration

A trader wears a Maga hat on the floor of the New York Stock Exchange. Reuters

The US stock market is humming three weeks after Donald Trump's 2024 election victory, but investors are keeping a cautious eye on the president-elect's tariff agenda before his inauguration next year.

Much of the market's positivity stems from pro-business policies on which Mr Trump campaigned, including deregulation across various sectors, as well as boosting the nation's domestic oil supply.

“This is the most positive I've been in many, many years – the outlook for 2025,” said Peter Andersen, founder of Andersen Capital Management. “I've had a very strong November, and I do think it's because of all the deregulation that investors are anticipating over next year and beyond.”

The Dow Jones Industrial average has risen by more than 6 per cent since November 5, closing at a record-high 44,860.31 on Tuesday.

The small-cap Russell 2000 Index broke 2,450 for the first time on Monday, while the Nasdaq Composite is up nearly 4 per cent.

With the election in the rear window, investors are now looking at what the coming months will bring. Even after taking a post-election breather, the stock market was buoyed by better-than-expected retail earnings and strong Nvidia results.

Investors are now gearing up for December, which is generally seen as a better-performing month, as they scrutinise the US economic outlook and the Federal Reserve's December 18 interest rate decision.

“You're really starting to focus on fundamentals of stock selection and your outlook for the economy, and who the new secretary of Treasury [is], how that's going to impact the investment sentiment,” Mr Andersen said.

The flipside to the stock market's run in recent weeks has been a steady rise in Treasury yields, with investors cautious on the inflationary impact of a pro-tariff administration.

“We've kind of … replaced our election anxiety with policy anxiety,” said Art Hogan, chief market strategist at B Riley Wealth.

Mainstream economists generally argue an across-the-board tariff policy and plan to impose a 60 per cent tariff on Chinese goods would increase inflation, hamper growth and widen the fiscal deficit.

The president-elect on Monday offered a preview on his tariff plans, saying he would place a new 25 per cent tariff on products from Mexico and Canada, as well as another 10 per cent tariff on Chinese imports on the day he takes office. The plan was roundly criticised by government officials from all three countries who said that no nation would benefit from a trade war.

Yields on the 10-year Treasury climbed three basis points to 4.295 per cent on Tuesday, erasing some of the gains made a day earlier when investors were soothed by Mr Trump's nominee for the Treasury department, Scott Bessent. The two-year Treasury rose was unchanged at 4.252 per cent.

One basis point amounts to 0.01 per cent and prices move in opposite directions.

Investors hope Mr Bessent, a Wall Street macro-hedge fund executive and founder of Key Square Group, will be friendly to financial markets and guard against some of the president-elect's aggressive ideas on trade policies. While he has supported the idea of tariffs while campaigning for Mr Trump, Mr Bessent told CNBC that he favours a gradual approach to implementing them.

He also said the second Trump administration will continue to bring down inflation while boosting the economy.

“The new appointee is certainly Trump-friendly, so we have to figure out if he's going to temper that kind of spending or if he's just going to be taking orders, so to speak. So that's the one question mark I have,” Mr Andersen said.

Mr Hogan echoed Mr Andersen's sentiments, saying that Mr Bessent's nomination helped to calm bond markets.

The contrast between positive sentiment on major US indexes and concern in the bonds market is indicative of how investors are caught between Mr Trump's pro-business deregulatory agenda and the economic implications of a trade war.

“Thus far, investors have been able to take the potential positives and hope for the best of the potential negatives, but while keeping a wary eye on in how that gets implemented in the first 100 days of a new administration,” Mr Hogan said.