Following Donald Trump’s recent election victory, stocks, bonds and the U.S. dollar have appeared to follow the same pattern of performance from 2016. But that may not continue.When Donald Trump was elected in 2016, the stock market rallied strongly for the rest of the year and into the following one. Similarly, following Mr. Trump’s re-election on Nov. 5, the S&P 500 reached an all-time high.
Although the Fed is now on a path of cutting its federal funds rate, it’s doing so to make monetary policy less restrictive following its battle to reduce inflation. The federal funds rate is well above the neutral rate of interest that would support full employment and a 2-per-cent rate of inflation.
Not all of Mr. Trump’s policy proposals are conducive to moving the stock market higher in the short term. In 2016, his proposed tax cuts and deregulation boosted the stock market. However, the president-elect is now proposing to reduce government waste and lay off many government employees. In theory, tariffs make all countries worse off because they force goods to be produced in high-cost countries instead of low-cost countries. In the short term, tariffs will encourage companies to onshore production, boosting the U.S. economy. On the other hand, tariffs drive prices up.