Over the last few weeks we have seen the market continue the trend of the last years: up. There has been some volatility already but so far the indices have been moving higher. We do especially see an updrift in Europe. Europe has been relatively strong as Trump has softened a bit on the tariff statements. Initially, it looked like he might just tariff everything from Europe and China. Though, lately he has been saying there will first be some research into trade practices that are unfair according to the US. And after that decide which products to sanction. It will not be a surprise that most likely European cars will be tariffed. This will hit Germany the most. Germany, the motor of Europe, has been facing economic headwinds already for a few years and there is not a lot of hope for the next months/years. They have to invent themselves again and the economy cannot keep ‘driving’ on the automotive business.
And now?
We do expect that markets will relatively stay calm. There will for sure be some volatility on sudden moves and statements from Trump. Though, directionally we think the market will stay stable till one can really see the effects of the policies that Trump implements in the first few months. Geopolitics are important, but most people will watch what the effect of Trumps measures is on the inflation in the US and worldwide.
Inflation
Trump wants to fight inflation. Energy inflation is relatively easy to fight for him as he just will try to maximize the production of crude oil in the US. “Drill, baby, drill”. He will try to quickly produce more oil, so he can start claiming some victories on inflation soon.
Though, the medium and longer term effects of his policies might actually not help for the inflation level at all.
Effect of tariffs
The effect of introducing a lot of new tariffs makes especially goods just more expensive for everyone. In general there are no winners on the long term. Trade of goods becomes more expensive and this will have a unwished effect on inflation. Trump initially can say he does this to be able to make as many as products as possible in the US and to create more hobs. But the US does not have the ideal wages and cost of goods sold to do that obviously. For many goods, it is important to let them be produced by countries with lower wages. Inflation will be boosted if not.
Trump trying to push the fed
The effect of Trump trying to push FED members to lower rates quickly will not help either. Officially the FED is independent of politics. Though, with Trump nothing is independent of politics. He has enough power to make sure of that. Lowering rates and with that making money cheaper is not the way to fight inflation. You lower rates when inflation has really cooled off towards the target level, or when the economy needs stimulus. Both are not the case at the moment. Lowering rates too quickly now can bring a serious bounce in inflation.
Earnings
The earnings season has started in the US and we closely watch whether the earnings will bring a directional move in the stock markets. Most often this is not the case, unless many of the Magnificent 7 stocks will show very weak or very strong guidance.
To Conclude
We expect markets to have more volatility than in 2024. Though we do not think there will be a large directional move till more effects of Trumps policies are being seen in the markets. The most important figure to watch is the inflation and potentially surprise tariff actions can bring volatility back in the market too.
