Trump's presidency return ushers in new era of volatility in markets

Donald Trump’s inauguration on Monday could herald a more volatile period for markets, with the Republican seen moving quickly on a wide swath of issues including trade and immigration that are expected to swing asset prices.

Trump’s tariff plans could further fan inflation fears that pressures bond and stock prices, while efforts to tighten immigration controls could also reverberate through those markets. Moves to ease regulation are poised to lift assets, including crypto and bank stocks.

“The markets will be very sensitive to this speech,” said Jeff Muhlenkamp, a portfolio manager at investment management firm Muhlenkamp & Co. “Everyone right now is trying to parse every word and nuance that comes from Trump or his biggest allies.”

Some prices already incorporate Trump’s expected policy aims, among them tax cuts, reduced regulations and tariffs on foreign imports. The address could also lay the groundwork for White House actions in the coming days and weeks.

“Financial markets are primed to move on any indication that the new administration might pursue a different course than it has telegraphed up until now,” said Doug Peta, chief U.S. strategist at BCA Research.

In general, stocks have had a tepid reaction to presidential inauguration, although this time could be different given Trump’s potential to be unpredictable and ability to shake markets with his commentary, investors said.

With inaugurations since World War II, the S&P 500 has posted an average decline of 0.27%, with the index rising or falling on about half the occasions on the day of the speeches themselves or on the first day of trading following instances markets were closed, according to LSEG data.

Following Trump’s last inaugural address, in January 2017, the S&P 500 ended up 0.3% on the day. The U.S. stock and bond markets are closed on Monday, which is also the Martin Luther King holiday, so much of the trading reaction may not be evident until Tuesday.

During the entirety of Trump’s first term, the S&P 500 rose nearly 68%, but markets saw bouts of volatility, stemming in part from a trade war Trump fought with China.

Of course, investors for months have been shifting portfolios based on the impending change in the White House, with many so-called “Trump trades” gaining steam even ahead of the November election when he was leading in polls and betting markets.

For example, shares of Tesla, which is led by Trump backer Elon Musk, have soared 60% since the Nov 5 election. Other gainers include bitcoin, which has jumped over 30% since Trump’s win amid optimism for a friendlier regulatory environment, and private prison stocks Geo Group and CoreCivic, which have climbed about 100% and 60%, respectively, as investors anticipate an immigration crackdown could increase need for detention centers.

“The markets are trying to start to price in policy before the policy has come into vision in any clear way,” said Tony Roth, chief investment officer at Wilmington Trust.

Some “Trump trades,” however, have faded. Those include shares of regional banks and small-cap companies, which are both expected to benefit from a de-regulation push under Trump, and have given up at least some of their post-election gains.

The broader stock market has also lost steam. Optimism over Trump’s expected pro-growth agenda including reduced taxes and regulations broadly benefited equities following the election.

But the S&P 500 has pulled back and is now up about 1% since Nov 5. Persistent inflation is leading markets to predict the Federal Reserve will end its interest rate cutting cycle sooner than previously hoped, undercutting the stock market’s momentum.

Investors are wary of specific topics causing ruptures. David Bianco, Americas chief investment officer at DWS Group, will be listening for any hints about tariff introductions in the inauguration speech, adding that “Trump has got the ability to take action on tariffs and he probably does very quickly” and that such comments could “sour the mood for investors.”

In particular, Bianco said, “the bond market should be on guard” for Trump’s comments. Benchmark Treasury yields, which rise when bond prices fall, on Friday hit their highest levels since November 2023 after a blowout U.S. jobs report fueled more inflation anxiety.

Investors are mindful Trump may voice some unusual ideas, along the lines of his recently expressed desire to annex Greenland, or tout goals that suggest major spending, which could exacerbate concerns about the expanding fiscal deficit.

Jay Woods, chief global strategist at Freedom Capital Markets, said he is watching which business leaders might be attending the inauguration events.

Agencies