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Oliver’s Insights: Trump 2.0 – Why investors should expect a somewhat rougher ride, but it may not be as bad as feared

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By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Investments

Key points

  • The economic and financial environment today is more challenging than when Trump first took over in 2017: inflation is a bit higher, the budget deficit is worse, bond yields are higher and shares are more expensive.
  • He also faces constraints from: rising bond yields; not wanting a sharp fall in shares; a razor thin House majority; and a political mandate to get the “cost of living” down.
  • This could mean his more populist policies may ultimately be contained resulting in a better outlook for shares than many fear, albeit it will likely still be rough along the way.

Introduction

Donald Trump’s US election victory – that saw him win the popular vote (albeit only by 1.7%) with increased support from low income voters, various racial groups, women, the young, etc, with Republican’s having control of Congress – has shocked many. Particularly here in Australia where support for him was always low versus Harris. His detractors – and don’t forget 48.3% of American voters voted for Harris – see him as bad for the environment, diversity/equity and inclusion (DEI), inequality, democracy, the rule of law, global peace and the economy (via bigger budget deficits, inflation and trade wars). Weaker checks and balances this time around – including his inability to run again and more MAGA loyalists in his team suggesting a quick move to implement his policies – are seen as adding to such concerns. On the environment and DEI, it’s hard to argue otherwise as a majority of American voters have clearly put the economy ahead of the environment and DEI. But the old-fashioned “hip-pocket nerve” dominating in times of economic stress is nothing new – with the main issue in the US (Australia and elsewhere) being the rise in the cost of living and the fall in real wages over the last 4 years.

Share of voters saying each issue was the most important

Source: AP VoteCast survey

But environmental and social issues aside, his supporters see him reinvigorating the US and being great for world peace. As is often the case the truth is probably in between, but it could be rough along the way. Straight after the US election result we had a close look at the implications both for investment markets and for Australia in Donald Trump elected President of the US (again). This note looks at the differences between now and when Trump first took over in 2017 and the constraints he faces.

The market reaction becoming more nuanced

Trump’s key policies are to continue the 2017 personal tax cuts, cut corporate tax, impose a 10-20% general tariff and a 60% tariff on China, deregulate and cut bureaucracy, slash immigration and deport people, potentially reduce Fed independence and reverse Biden’s climate policies. The market response to Trump’s victory is becoming a bit more nuanced:

  • US bond yields are up 0.8% since mid-September partly on fears his policies will drive higher inflation, budget deficits & Fed interest rates.
  • This has seen the $US surge to its highest in more than a year.
  • Bitcoin and other crypto currencies have surged (notably Dogecoin) as Bitcoin broke its downtrend since March and on expectations Trump would be supportive of crypto (along with Elon Musk’s appointment to co-run the “department of government efficiency (DOGE)).
  • But global shares are starting to have a tougher time with US shares reversing 50% of their post-election surge and non-US shares have been underperforming on concerns US tariffs will be bad news, albeit it hasn’t held Australian shares back which have hit a record high.
    There is good reason for this more nuanced response from shares.

Big differences compared 2016

Some point to the Trump 1.0 experience of 2017-20 as being okay economically (apart from Covid which wasn’t Trump’s fault, albeit the US response was messy). Through that period shares rose in 3 years out of the 4 for an average gain of 17% pa. Aside from the reality that the world was a bit more peaceful in the 2017-2020 period compared to now, the economic and financial environment today is a bit more difficult.

  • Inflation is a bit higher: underlying inflation was running around 2% in 2017 with long term inflation expectations around 2.5%, whereas now they are both around 3% with inflation psychology a bit less anchored than it was then after the blow out over the last four years.

Source: Bloomberg, AMP

  • Unemployment is bit lower: it was around 5% in early 2017, whereas now it’s just above 4% suggesting the jobs market is tighter.
  • The budget deficit is worse: in 2017 the budget deficit was around 3% of GDP and gross Federal debt was around 105% whereas they are now pushing 7% and 125% of GDP respectively.

Source: Bloomberg, AMP

  • Bond yields are higher: when Trump was elected in 2016 the US 10-year bond yield was 1.8% as disinflation was all the rage, but it’s now 4.4% reflecting the somewhat higher inflationary environment, higher Fed interest rates and the higher budget deficit. Similarly, Australian 10-year bond yields were 2.4% back then versus 4.6% now.
  • Shares are more expensive: when Trump was elected in 2016 US shares were trading on a price to consensus 12 months ahead earnings expectations of 17.2 times having just recovered from a rough patch in 2015-16 that saw a 14% correction, but it’s now around 23.7 times after several years of good gains. Don’t forget that just as shares rose strongly over the 2017-20 period under Trump 1.0, they also rose strongly over the last four years under Biden with shares up 3 years out of 4 for an average gain of 16% pa.
  • This means US shares are now offering a zero-risk premium over bonds: the gap between the earnings yield using consensus expected 12 months ahead earnings and the 10-year bond yield was around 3% when Trump was elected in 2016, but it’s now slightly negative. It’s a similar story for Australian shares but at least it’s still positive. Similarly, Eurozone shares are now less attractive than in 2016, albeit they offer far more attractive valuations than US shares do.

Source: Bloomberg, AMP

Put simply and taken together this means that the economic and investment environment is more challenging than it was in 2016 at the time of Trump’s last victory. This in turn suggests that the upside in share markets is potentially far more constrained than it was in 2016. This in turn will impose some constraints on Trump which hopefully will constrain his worst policy making.

Constraints on Trump

While the constraints on Trump are not as numerous as was the case in 2017-2020, they are still significant and may help limit his worst populist tendencies. The key constraints are:

  • The so-called bond vigilantes – the starting point of higher bond yields and higher public debt means a greater risk of a bond market panic if the deficit outlook gets worse, than was the case in 2017. Back then debt interest expenses on general government debt in the US were around 6% of spending whereas it’s now pushing 10.5% which is worse than Italy. A further sharp rise in yields would threaten US economic growth (with the housing market already back under pressure) and lead to intense political pressure on the Trump Administration to curtail the tax cuts. Much like occurred with the brief UK Truss Government.
  • The share market – Trump is still likely to regard the share market as a barometer of his success and would prefer to see it go up. This was evident in 2018 when the near 20% slump (19.8% to be precise) in the US share market from its high in September to low on Christmas Eve 2018 partly in response to the then trade war unnerved him and saw him pivot to the Phase One trade deal with China. In other words, he can tolerate some weakness in shares but once it approaches bear market levels (20% or more) he gets nervous and backs off.
  • Conservative Republicans and the mid-terms – The Republican’s razor thin majority in the House means that it will only take a few budget hardline Republican members to insist Trump scale back his tax cuts or fund them via more spending cuts. What’s more 2026 will be another election year and if Republicans are struggling due to a backlash against his policies – e.g. due to cuts to Federal services due to the efforts by Musk’s DOGE to slash government spending or higher inflation flowing from a tariff hikes or a bigger budget deficit or higher interest rates – it will intensify pressure on Trump to tone it down.
  • Mandated spending – while Musk has claimed he will cut $US2 trillion out of the Federal spending this is harder than it looks. The total budget is $US6.75 trillion and about two thirds of that is in defence, social security and health and it’s doubtful voters will support that being slashed. Which leaves only $US2.25 trillion to play with.
  • Trump’s mandate – while Trump had a strong victory it was mainly around improving the cost of living and controlling immigration. The former likely goes to containing spending (but without slashing it such that ordinary American’s see their cost-of-living rise via higher health and education expenses) and deregulating but not to huge tariff hikes as this will add to the cost of living via higher prices. On this it’s noteworthy that various surveys show that worries about globalisation and trade ranked very low on the list of concerns that voters had. So it’s doubtful that American’s will be supportive of a rise in their cost of living flowing from a sharp rise in tariffs.

Concluding comment

Taken together these constraints may ultimately serve to nudge Trump more towards Reagan like supply side reforms and less towards populism with a focus on tariffs. Which could ultimately be a good outcome for investment markets. That said it could still be a rough ride along way – possibly including another perhaps bigger version of the 2018 fall in shares before Trump moderates his policies. But overall, while the starting point for shares is not nearly as positive as it was in 2017 the outlook may not be as bleak as some fear, with global shares likely to provide constrained but still okay returns.

This article was sourced from AMP Investments and published with permission.

Don’t Let Fears Get in the Way of Your Goals

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Money makes just about everyone nervous. And as we’re approaching major life transitions, it can be hard to keep our money worries in check. But when you’re working with an adviser and following a Life-Centred Financial Plan, many of your financial fears are no more real than the fear itself.

Let’s pull back the curtain on two common financial fears that could be negatively impacting your Return on Life.

Fear of Investing

When you make any investment, you’re taking on risks. That’s why many folks who are skeptical think the share market is just a big casino where the house always wins. Because they’re worried that their investments won’t pay off, they prefer to “play it safe” by keeping most of their money in the bank. They might even apply this “safe” mindset to other aspects of their lives. Why “invest” in a gym membership when your fitness resolutions have always failed? Why “gamble” on yourself by starting your own company when the odds seem stacked against you?

Unfortunately, in both finance and in life, there’s no growth without risk. The give-and-take between buyers and sellers that causes market volatility is also what creates value and, for disciplined investors, increased wealth in the long run. Your Life-Centred Financial Plan is designed to account for, weather, and even take advantage of these quantifiable and manageable risks.

You can also plan to make more effective investments in other aspects of your life. For example, ditching resolutions for incremental SMART goals – Specific, Measurable, Achievable, Relevant, and Time-Bound – can help you face your fears and start achieving more.

Fear of Spending

In addition to following a diversified investment strategy, living within your means and keeping debt under control are often keys to financial success. But frugality that’s rooted in fear can turn a good habit into a bad relationship with money.

Folks who spend their working days only working for more money often miss out on too many of life’s most meaningful moments. An obsession with “hitting a number” that will magically create financial security can distort a person’s retirement timeline. Some people work longer than they have to and miss out on that sweet spot between leisure time and good health. And even if they do “hit their number,” seniors who were afraid of spending when they were earning a monthly paycheck are often terrified to open their wallets once they start living off a fixed income. These retirees often struggle to switch from a saving mindset to a reward mindset. As they did when they were picking up all those extra weekend hours, they put off dream vacations and creature comforts. They figure they’ll start spending more and doing more “when the right time comes.”

Sadly, for many folks who are too afraid to follow a financial plan and use their money to enjoy life more, that “right time” never comes.

Who ya gonna call?

Don’t let these kinds of scary stories keep you up at night. Let’s schedule a catch-up to put your financial fears to rest and help you feel more confident about 2025.

Preparing Your Adult Children for Inherited Wealth

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Most children learn the ins and outs of responsible wealth-building from their parents. As kids grow, simple conversations about saving and spending often branch out into investing, compounding, and comprehensive Life-Centred Planning. But no matter how many good financial habits your children have learned by adulthood, they could still be unprepared for their role in your legacy plan.

Talking to your adult children about inheriting your wealth might be awkward at first. But if you work through this six-part framework you’ll all feel better about your wishes, your kids’ responsibilities, and your family’s Return on Life.

Review your estate plan.

While you’re still around to change it, your estate plan is never set in stone. Every year, sit down with your financial adviser and solicitor to make sure you’re still happy with your beneficiaries, your health care directives, and the allocation of your assets. You’re under no obligation to share every aspect of your finances and health with your children. But the more you tell them about your legacy plan now, the easier it will be for them to care for you and settle your affairs when the time comes.

Consider the impact on your heirs.

Money impacts different people very differently. Inheriting a portion of your legacy could be life-changing for one of your children. Another might not experience much of a change at all. Encourage your children to put together their own team of financial, tax, and legal professionals who will help them make the best use of their inheritance with the least amount of hassle.

Promote responsible behavior.

You may feel like you have no choice but to leave some of your wealth to an adult child who doesn’t have the best financial habits. However, it is possible to establish guardrails, such as a family trust that releases money under certain conditions that you establish in your legacy plan.

Even the most responsible children might not be capable of managing a company, real estate, or an art collection. Talk to your children about how their abilities and goals fit with how you want more complicated assets to be managed.

Set realistic expectations.

Your children likely have ideas about your wealth and expectations for what they will inherit. Have an honest conversation that will help them recalibrate those expectations properly. You don’t want your kids to plan for a life of luxury that you won’t be leaving to them. But if they’re set to inherit more than they realize, you also don’t want them planning for a too-frugal future lacking certain experiences and comforts.

Shore up your plan.

By now you have identified some strengths and weaknesses in both your legacy plan and your children’s financial skills. Use this information to plan for improvements. Talk to your financial team about vehicles that can protect certain assets and encourage responsible stewardship. Assign an appropriate executor who will oversee your estate. Work with your children on a plan to develop the knowledge and skills they’ll need to manage more complicated assets. Identify potential mentors whom you can trust to guide your children after you’re gone.

Clarify your intentions.

Sometimes the assets in an estate plan get in the way of the real purpose of the estate plan. You aren’t just passing on stuff – you’re passing on values, experiences, and the means to do more with money than just have more money.

Tell your children what you hope they’ll do with your legacy, not just to make their own lives better but to make life better for their own families, friends, and communities. If you’ve made choices in your legacy plan that might be difficult for your kids to accept, explain your reasoning and your intentions. If you can’t reach a place of agreement, at least try to reach a place of understanding and mutual respect.

And if you need help facilitating these conversations, consider bringing your children into our office for a meeting. We’re always happy to help families prepare for legacy events that preserve and respect what matters most.

Being a Good Steward of Your Time in Retirement

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When you’re a new retiree, staring at that blank page where your work schedule used to be, time might seem so abundant that you forget just how valuable it really is. But if you treat retirement like an endless weekend, you might be surprised to look up in a month, a year, or a couple years, and realize you don’t feel as fulfilled as you thought you’d be. All those hours puttering around the house might suddenly feel like a precious resource you’ve wasted.

Being a good steward of your time is a skill that will only become more important as you progress in retirement. Here are some ideas to help you manage your days with a sense of purpose and contentment that will improve your “Return on Life”.

1. Create a new daily routine.

You’re going to love those first few days without an alarm clock rushing you towards your work commute. But your days are going to start lumping together into a repetitive blah without structure and purpose.

Your new retirement routine doesn’t have to be as rigid as your old working one. The goal should be to create a flexible routine that gives you time for a variety of activities, both alone and with the people you love. Start by adding some simple anchor activities, like a morning walk or an afternoon cup of coffee with your neighbor. Then block of time for your favorite hobbies, like a Friday morning round of golf or a weekly trip to the library. As your schedule starts to fill up, you’ll gain a clearer perspective on how much time you have, how you’re using it, and how to use it better.

2. Prioritise your passions.

When you were working and raising a family, it’s likely that you had to put your hobbies and interests to the side as you focused on other responsibilities. In retirement, you can give those passions a more prominent place on your schedule. Work with a coach to get better at your favourite sport and enjoy the games you love even more. Devote more time to your favourite craft and turn hobbies into real skills. Take weekly volunteer positions with organisations that are making a difference in your community. Start scheduling all the bucket list trips you’ve delayed over the years. Or develop that business idea that’s been incubating for your whole career into a new company that you can lead as CEO.

3. Nurture your relationships.

The more people you share your time with in retirement, the more rewarding your retirement is going to be. Set aside time in your new schedule to deepen your connections to your friends and family. Call up retired friends and your old colleagues and schedule some lunch dates. Get your old foursome back together on the weekends. See if your grandkids need a volunteer coach or a tutor. Mentor the next generation of professionals who are just starting out in your field. If you’re married, sit down with your spouse and discuss how both of you are envisioning an ideal retirement: the things you want to do together, and the individual passions you want to pursue separately. Stop putting off the big vacations that never fit into your work schedule and treat your whole family to a dream trip.

4. Leave room to experiment.

Most successful retirees will tell you that retirement isn’t a one-time life transition: it’s an ongoing process that you will refine over time. Allow for some trial and error. Take chances on new opportunities and new experiences. Spend some time doing things you’ve never dreamed of trying and you might find that your retirement is more full of promise and possibility than you ever realized.

Let’s meet to discuss how our Life-Centered Planning process and interactive tools can help you get more out of your time and your money in retirement.

What Story Do You Want Others to Tell About Your Life?

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“I want them to not only do what’s legal obviously, but I want them to judge every action by how it would appear on the front page of their local paper.” (Warren Buffett)

That’s master investor and CEO Warren Buffett describing how he wants his 330,000 employees at Berkshire Hathaway to work every day.

Imagining how your own life would look on the printed page can be a helpful exercise when you’re building a Life-Centred Financial Plan. After all, the purpose of a financial plan isn’t just to earn more money. It’s to grow assets that help you live a life that fulfills you and that you’re proud of.

As you think about the story of your life, ask yourself these three questions to reflect on what’s happened so far and to write an inspiring rough draft of the chapters ahead.

1. What goals have I achieved?

A legacy filled with positive stories doesn’t just happen. The happiest and most successful people are often those who live their lives the most intentionally. Rather than waiting around for life to happen to them, they dream big, set goals, and work hard every day to make progress.

If you want to be thought of as a consistently high achiever, start out small. Identify one or two goals you’d like to achieve in six months to a year that build towards bigger overall goals. Then, break down those goals into daily actionable steps.

The great thing about this technique is that you can apply it to just about any aspect of your life. Long-term financial goals might start with a brown bag lunch three days per week and increasing monthly contributions to your retirement accounts. A fitness goal might start with taking a long walk every morning. And creating your own dream company might start with an online class you take to learn a new skill or earn a new certification.

2. How did I learn from the mistakes I made?

No person’s life journey avoids every bump in the road. There were, and perhaps will be, times when you make the easy choice instead of the right choice. You’ll do things that hurt others or embarrass yourself. A big business swing could come up empty. You might lose perspective and place your friends and family behind things that aren’t as important.

Try to accept that these kinds of mistakes are a given. But will you let these errors define your life? Or do you want people to remember how you responded, rebounded, made amends, course corrected, and came out the other side a better, more thoughtful, more caring person? When you’re looking back on your life decades from now, these stories of learning and growth will be far more important than the stumbles along the way.

3. How did I impact others?

Many people don’t start thinking about their legacy planning until they’re retired and nearing the end of their lives. But your legacy is bigger than what you bequeath in your last will and testament. Your legacy is defined by the actions you take and the choices you make every single day.

You may not love everything about your job. But you can choose to show up every morning with a smile on your face and to treat every coworker and customer with kindness. You may not be rich, but the weekend volunteer shifts you put in at your local food bank will make life easier for folks who are in need. You may never achieve perfect work-life balance. But your family will always remember the summers when you coached the kids’ soccer teams or carved out enough free time to take that big family vacation.

Again, authoring these kinds of life stories doesn’t just happen. Living your best life possible with the money you have is a process that combines long-term vision with intentional planning. If you need help writing your next chapter, please get in touch and we can talk about our Life-Centreed Planning process, your life, your goals, and your legacy.