With Donald Trump swearing in for his second time as the President of the United States of America, markets ought to brace for a “tricky” first half of the year as investors go through a “period of discovery” while coming to terms with what Trump and Jerome Powell, the chairman of the Federal Reserve, will do.
”But as we go into the second half, we will get better clarity, and then the markets may gather more steam and post better returns — there are no shortcuts,” says Vasu Menon, managing director of global wealth management at OCBC Bank, in an interview with The Edge Singapore.
Following Trump’s electoral victory in November, the markets have experienced both tailwinds and headwinds. For other countries, the biggest worry was whether Trump would impose tougher tariffs on US trading partners.
Domestically, he has threatened to deport undocumented immigrants estimated at around 11 million strong, possibly causing labour costs — and, by extension, inflation — to go up. On the other hand, he has dangled promises to cut taxes — repeating the same popular move he made in his first term. “The big question is whether President Trump is going to be what Candidate Trump said he would be,” he says.
Menon expects some of the tailwinds to come into play initially. The markets are now focused on the potential of tax cuts to be extended after 2025, increased spending and deregulation for a more pro-business approach.
As for the threat of tariffs, Menon hopes that common sense will eventually prevail and that Trump will not do anything drastic. Trump is quite determined to implement the pro-business policies he has discussed, but he seemed less determined to implement some of the negatives, like tariffs, which are more like a bargaining tool. “Trump has wielded the tariff baton, but you have not seen him do anything drastic yet, but it remains to be seen. We will know when he takes office,” says Menon.
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Nonetheless, investors tend to see Trump, for all his polarising personality, as a President who will be positive for growth and for businesses in general. Suppose he tries to turn some of the outlandish rhetoric into reality. In that case, he may face checks and balances from within his own Republican Party where common sense and rationality still prevail, says Menon.
Trump can be seen to require external validation as well. “He looks at the stock market very carefully and sees that as his report card. If he does anything too drastic, and the stock market plunges, or the bond market plunges, he will backtrack. So, I think that comfort is in the back of people’s minds,” says Menon.
As such, Trump is seen to be good for the economy and the US stock market. “US exceptionalism will continue to prevail, so the US stock market should continue to do well. But I think everyone is waiting with bated breath because of his unpredictability and what the Fed will do in the next six months.”
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The US Federal Reserve, for now, is seen as another considerable uncertainty. Much of what the Fed will do will depend on what Trump does and what the economic data indicates. The most recent job numbers for December beat expectations and suggest that the Fed does not need to cut rates that quickly. “Once we come to terms with the fact that perhaps things are not so bad or drastic with both Trump and with Powell, then the markets will have enough confidence to come back into play,” says Menon.
“I don’t think the Fed’s decision is driven by Trump but by the economy and inflation," says Vasu Menon of OCBC / Photo: OCBC
Lame-duck Fed?
Yet, some commentators have wondered if Powell would be too unduly influenced by Trump and do the president’s bidding instead of maintaining the Fed’s independence.
Menon disagrees. He believes that Powell is going to push back and has made it clear the US government has no authority over the Fed and that his term is up till 2026, which gives him another year or so to uphold the mandates of the Fed, which is primarily to keep a lid on inflation and, to a smaller extent, stave off unemployment. “I don’t think the Fed will be bullied by Trump. But the Fed will also be careful because what Trump says he will do will impact the economy and inflation,” he says.
Menon observes that even before Trump took office, US inflation while coming down from the pandemic highs, had become quite “sticky”. “Even if there’s no clarity on Trump’s policies if the economy and inflation numbers continue for whatever reason, then the Fed may still cut rates,” says Menon, adding that this might occur first in March and then June at 25 basis points each.
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“I don’t think the Fed’s decision is driven by Trump but by the economy and inflation. And many of the Fed’s decisions and what they’ve communicated took place in November before Trump came into office. So I don’t think they will be a lame-duck Fed. They will still be able to act according to economic data,” says Menon.
Now, of the two mandates of inflation and employment, Menon believes that the Fed will be more focused on the former because of the risk of what might happen with Trump’s policies, which will not be clear how that will play out and therefore, investors would need about six months’ worth of data on inflation and employment, and then see what Trump is going to do, before forming a clearer view. “We have several question marks that need to be addressed,” says Menon.
In the meantime, the economy is doing relatively well. In the corporate sector, earnings have been relatively resilient; liquidity is huge, with US$6.7 trillion in money market funds sitting on the sidelines. “There’s a very healthy level of scepticism in the markets. Investors do not have irrational exuberance. And I think that’s helpful because it means that, you know, there’s still a lot of dry powder firepower on the sidelines that will come back in the markets when we get greater clarity,” he says.
Menon believes that despite the volatility, investors will remain enthusiastic about the tech sector, which has driven the overall gains.
Unsurprisingly, Menon is upbeat about the AI investing theme and has more legs to run. “AI spending will be very significant in the next 10 years; the hyperscalers in the US are still spending a lot of money. If you look at transformational technology historically, from mainframes to mini-computers to mobile devices, the usual time span is 10 to 15 years. So, AI is still in its infancy. It is still being discovered applied, and we’ve not seen its full application take effect yet,” he reasons.
Menon believes that investors, having enjoyed gains betting on the so-called Magnificent Seven, will now pay more attention to underperforming segments of the broader tech sector and the US economy.
Excluding the Magnificent Seven stocks from the S&P 500, it would not have done as well. Most S&P 500 component stocks are the old economy names in consumer discretionary, consumer staples and healthcare. “Some of these old economy sectors could play catch up,” says Menon.
Meanwhile, Menon points out that the economy, earnings, and liquidity eventually drive the market. “At this juncture, these three drivers are relatively decent, and as long as they hold up and once you go past this discovery period, markets will be able to find their footing,” he says.
Consumption plays in China
As for China, the key event to watch is the 14th National People’s Congress (NPC) held on March 5, where the leadership is seen to announce further measures to support the markets, coming on top of other moves already put in place, such as hiking civil servants’ pay to boost consumption. “So I think the big question is, what will they announce in March? Everyone is waiting for the government to announce its growth target and what it will do,” says Menon.
With the spectre of an escalating trade war with the US under Trump, Menon believes that additional new stimulus would likely boost domestic consumption, which will then help the markets regain some confidence.
“For now, it seems to be the Chinese government recognises that the economy is a problem, and they are prepared to put a backstop, and they are prepared to do something a bit more aggressive. The devil is in the details,” says Menon.
However, Menon cautions that even though the Chinese government intends to revive its economy and the markets, investors have to temper their expectations of something “really big” coming out of the NPC meeting. “They may fire some bullets in March, but then they will also want to save some ammunition for what Trump might do down the road,” he explains.
Investors should also know that Chinese stocks are trading at just half the valuation accorded to US stocks. “There’s a lot of potential. What we need is the trigger that will spark the excitement back.”
