President-elect Donald Trump proposed various economic policies during his campaign, such as reducing corporate taxes, extending personal income tax cuts, and imposing tariffs on imports. Analysts widely anticipate that Trump's internal tax cuts and external tax hikes could lead to a resurgence of inflation in the U.S.
Jeremy Siegel, a top economist and professor of finance at the Wharton School, stated that Trump might not fully implement his proposed economic policies to maintain support from stock and bond investors. Siegel believes Trump will adopt a pro-market stance in his next term, even if it means sacrificing some proposed policies. Trump has often used the stock market as a measure of his success as president, making him unlikely to disrupt the current bull market.
Economists are concerned that some of Trump's proposals could increase the federal deficit and lead to higher inflation. The bond market reacted last week, with the yield on the U.S. 10-year Treasury notes soaring to over 4.4%, the highest since July. Though yields have stabilized since, Siegel notes that bond investors may protest any policies that increase government debt or inflation.
Siegel also suggests that investors are wary of rising inflation and anticipate a potential rate hike from the Federal Reserve. The surge in bond yields following Trump's victory serves as a warning to be cautious about his tax cut promises, indicating skepticism from the market. Both bond and stock markets could limit Trump's plans significantly.
With a Republican-controlled Congress, Siegel expects Trump to easily extend the 2017 tax cut plan, though other tax cut proposals may face challenges. Should Trump execute all proposed tax cuts, bond yields could potentially exceed 5%, leading to a trend of rising long-term interest rates.
Siegel added that it's unlikely Trump will take control from the Federal Reserve despite plans to exert more influence on its policy decisions. Such a move could be unwelcome by the market, which favors the Fed's independence. Any significant interference with the Fed's autonomy could negatively affect both bond and stock markets.
