Trump’s rhetoric: Mostly a wish list

As we step into the new year, stocks have soared in celebration as Donald Trump took the reins of office. This transition of power has brought a wave of optimism, which can continue, although a mild bout of profit-taking in the near term should be expected.

A flurry of Day One executive orders kept the markets busy parsing the meaning of this one or that one. However, the enthusiasm had more to do with what President Trump did not do than what he did. The greatest fear of investors was that the president would levy 10% tariffs across the board on all nations. Some nations, such as China, Mexico, and Canada, were expected to get hit by even higher duties on Day One. It didn’t happen.

Most economists are convinced that tariffs would not only hurt economic growth both here and abroad but also fuel further growth of inflation. That does not mean that tariffs are off the board. The president indicated that tariffs on our North American trading partners could be announced by early February. China, however, not so much.

The currency markets immediately began to sell the dollar, which has been a winning trade (up 10%) over the last several months. Foreign nations have been willing to see (or orchestrate) their currencies decline to reduce the impact of the expected 10% tariffs Trump promised during his campaign. See how that works?

As a result, the yield on U.S. bonds fell in tandem with the dollar. Those developments partially explain the rally in equities. Of course, this trade can reverse in the blink of an eye. The president has not said tariffs are off the table. I believe it is just a question of when some countries will be targeted for tariffs. Trump has made it clear that tariffs are a negotiating tactic. There is no reason to think he would drop this tool in the days and weeks ahead. However, do not tariff trade. That is a losing proposition for those who tried that during Trump’s first term.

This week, the Federal Reserve meets on Jan. 29. Expectations are that the FOMC (Federal Open Market Committee) will stand pat, keep interest rates where they are, and take a wait-and-see attitude toward the future. Bond investors are not expecting any more than one or maybe two interest rate cuts (if any) during 2025. Many of the president’s policies could boost economic growth and possibly inflation and the Fed will want to see how the government’s economic policies unfold.

Investors are focusing almost solely on Donald Trump. In a Davos speech on Thursday, Jan. 23, for example, the president said that interest rates around the world should be “dropped immediately” and that the price of oil should also be lowered. Taking those statements as gospel, I think is a mistake.

A U.S. president may be able to jawbone an easier interest rate policy from a Fed chairman. It has been done before, for example, under Richard Nixon’s administration, but he has zero influence on other central bankers worldwide. As for the oil price, OPEC + is not about to reverse policy quickly, nor would Saudi Arabia agree without some kind of multi-billion-dollar trade deal since that nation needs Brent Crude at $90/bbl. or higher to balance its budget.

After living and investing through Trump’s first term, I learned that much of what the president says should be taken with more than a grain of salt. I consider his many pronouncements as more of a wish list, some outrageous, others as catalysts for change. He announced his new initiative called Stargate this week. It is an artificial intelligence infrastructure project, which is a joint venture formed by OpenAI, Oracle, and SoftBank. It is a great idea that promises big dividends for our country.

The three companies, he said, would invest $500 billion in AI infrastructure. Yet Elon Musk, the world’s richest man and a close Trump adviser, who was also an early investor in AI, responded to the announcement by expressing some doubt.

He posted on his social platform X that these venture partners “…don’t actually have the money,” to accomplish the president’s goal. His critique enraged many of the president’s yes-men, but the beauty of Musk is that he can speak his mind with impunity. That may get him in trouble down the road with his new-found, best bud but not right now.

The point is that investors should not take everything the president says as gospel. Instead, consider his statements more of a directional outline of where he wants the nation and the world to go. It doesn’t mean that what he wants he gets, as his first term demonstrated.

As for the markets, I am looking for a small pullback in the markets over the next few days leading up to the FOMC. I would consider that a gift. It would be a dip worth buying before the market resumes its climb to new highs.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.