Transcript: Trump 2.0 strategy will increase market volatility
Chris Dillon of T. Rowe Price says incoming president’s neomercantilist views will upend trade policy and could spark return to higher interest rates
- Featuring: Chris Dillon
- January 21, 2025 January 21, 2025
- 13:01
- From: T. Rowe Price
flickr/White House
Chris Dillon
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about investor expectations for a second Trump presidency with Chris Dillon, investment specialist with T. Rowe Price. We talked about policy proposals and their impact on Canada, and we started by asking what word best describes the incoming U.S. president.
Chris Dillon (CD): This is going to be a mouthful: neomercantilist. Neomercantilism links the prosperity of states to their military, industrial, financial or technological power, and uses trade policies specifically as a tool to secure those goals. That’s my one-word description for Donald Trump. We’ve had this great moment in time: the end of the Cold War, the fall of the Soviet Union, China joins the World Trade Organization, peak globalization. The world is now different. It started to change during the first presidency of Donald Trump. COVID-19 changed the game. And now it feels like a march backwards, if you will, to the world that predates that peak globalization time-period that I just described.
Sectors that could benefit
CD: So, if we go back to that definition of neomercantilism, generative AI and the productivity benefits that may come with this, that’s one way out of the heightened deficit, heavy debt, developed-world malaise that we’ve settled into. If you get a productivity revolution, that can just plow you through times when you’re overstretched as a sovereign nation. And then, just thinking of the military and heightened geopolitical risk? The best sub-sector of the S&P 500 during the first Trump presidency was actually the defence sector. So, technology would be number one. Defence, number two. But there’s also ‘drill, baby drill.’ When that’s part of your primary campaign promise, the energy sector certainly seems to factor in. And financial reform, deregulation is expected. Banks are already rocking and rolling on that news. So, I think those are areas of interest.
Trump’s first priority
CD: It looks like the attempt is going to be for ‘one big, beautiful bill.’ That’s how Donald Trump would describe it. Expiring tax cuts, energy policy, border security, immigration, spending cuts, potentially even debt ceiling embedded in that — all of that would be included in ‘one big, beautiful bill.’ Breaking it in two pieces seems more palatable, but not practical from a political perspective in Washington, D.C. So, one big, beautiful bill. That’s what it looks like. I would place the odds of that getting through at 20%? 30%? Uphill battle.
Market reaction to policy proposals
CD: You’ve already seen a reaction on this front. Core PCE, which was expected to fall 2%, actually went from 2% to 2.5%. No tangible data to back up that 2.5% other than Donald Trump got elected president on November 5. So Fed officials are already looking at tariffs and looking at a deficit in the U.S. that is 7% of U.S. GDP, an economy growing at 2.5%, an unemployment rate of 4.3%, and tax cuts on top of that, along with tariffs, and thinking that that is going to be a catalyst that actually takes inflation back up. We would not be surprised to see a return to a 5% 10-year U.S. Treasury yield in the very foreseeable future. And a tail scenario that is becoming increasingly plausible from our perspective is a 10-year treasury yield of 6%.
The impact on Canada
CD: The threat of 20% tariffs to Canada, that may already be some kind of breach of the free trade agreement between Canada, U.S. and Mexico. I already described President Trump as a neomercantilist. The other word would be unilateralist. Acting alone. Not bilateral. Not multilateral. This is going to be a transactional presidency. Challenges to the USMCA, I think you’d absolutely have to expect that.
And finally, how he’d sum up the current moment.
CD: So many moving parts. So much uncertainty. Expect heightened volatility. You’re already seeing it in rate markets. You’re going to be seeing it in equity markets. Security selection is going to matter a great deal. Since 2010, it’s been all equities and no fixed income. Right now, it’s a very different entry point for fixed income and a very different point for equities. This is my fancy way of saying that good old-fashioned 60:40 construct is going to work here. And it goes without saying, when I talk about 60:40, I’m talking about 60% global equities, 40% global fixed income. A global 60:40. We are in a neomercantilist world. Monetary policy is going to be different in different countries. Economic cycles are going to be unique. You’re going to have more divergence of economic policy. In an uncertain world, being diversified matters.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Chris Dillon of T. Rowe Price. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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