Stocks Stumble in Trump’s Second Term: A Rocky Start
The US stock market is experiencing turbulence as Donald Trump begins his second term in office. Initially, stocks surged post-election, driven by optimism over tax cuts and deregulation. Investors had largely overlooked concerns about Trump’s trade policies, with many viewing his victory as "pro-growth, pro-deregulation, and pro-markets," according to investment chief David Bahnsen. However, the optimism hassince waned. The S&P 500 plunged into correction territory, dropping 8% from its peak, despite a brief 2% rebound. Trump’s aggressive tariff tactics have sparked confusion and renewed fears of stagflation—a dangerous mix of stagnant growth and rising prices. Jeff Blazek, co-investment chief at Neuberger Berman, noted that the trade situation has worsened more than expected, creating significant growth concerns.
Investors Grapple with Uncertainty and Stagflation Fears
The unpredictability of Trump’s tariffs has left companies struggling to plan and consumers wary of spending. Blazek commented that the severity and breadth of the tariffs, combined with the administration’s hostile tone, have heightened anxieties. These fears are compounded by the possibility of stagflation, a scenario that could further erode market confidence. The lack of clarity around trade policy has forced investors to reassess their strategies, with many adopting a more cautious approach. The S&P 500’s forward earnings multiple remains elevated at over 20x, leaving little room for error if economic conditions deteriorate further.
A Shift in Trump’s Economic Priorities
Heading into 2024, market experts were overwhelmingly bullish, with few predicting a major downturn. However, the Trump administration’s decision to prioritize tariffs and federal spending cuts over tax cuts and deregulation has caught investors off guard. Tim Murray, a strategist at T. Rowe Price, noted that Trump no longer seems to view the S&P 500 as a key performance indicator, which could lead to further market declines. Murray has reduced his firm’s allocation to US equities to account for tariff and growth risks. The growing possibility of a recession, however remote, has already had an outsized impact on stocks.
Bulls Remain Optimistic Despite Headwinds
Despite the challenges, some strategists remain upbeat. Brian Belski, chief investment strategist at BMO Capital Markets, argues that economic fundamentals remain strong, with corporate profits exceeding expectations. He urges investors to focus on facts rather than emotions, emphasizing that the recent market weakness is rooted in uncertainty rather than underlying economic weakness. John Stoltzfus, Oppenheimer’s chief investment strategist, agrees, attributing the turbulence to short-term traders trying to shake out nervous investors. He advises those with a longer time horizon to seek opportunities in growth-heavy sectors like technology, communication services, and industrials.
Where to Invest Amid the Turbulence
While some strategists are bullish on growth-oriented sectors, others are more cautious. Blazek, for instance, expects the "Magnificent Seven" tech stocks to underperform, potentially leading to a broader market reset. He believes smaller, high-quality companies may outperform once clarity on trade emerges. Murray, on the other hand, is eyeing international stocks and US companies with a value tilt, particularly European banks, which could see significant valuation gains. Josh Jamner, a strategist at ClearBridge Investments, recommends targeting companies with strong dividend growth as a safe haven during this uncertain period.
A Path Forward for Investors
Despite the rocky start to Trump’s second term, many strategists remain hopeful. They point to robust earnings growth and a resilient economic backdrop as reasons to stay optimism. Belski and Stoltzfus are confident in the market’s long-term prospects, while Blazek and Murray emphasize the importance of patience and strategic positioning. As the market navigates the "wall of worry" around trade, investors are encouraged to stay focused on fundamentals and avoid reactive decisions. While the near term may remain choppy, the groundwork for a rebound appears to be in place.
