Thoughts on the Market: Potential Economic Consequences of Trump’s Executive Orders
Hosted by Morgan Stanley
Release Date: January 22, 2025
Introduction
In the January 22, 2025 episode of Morgan Stanley's "Thoughts on the Market," host Michael Zesas, Global Head of Fixed Income Research and Public Policy Strategy, delves into the potential economic ramifications of recent executive orders issued by President Donald Trump. The discussion centers on how trade policy uncertainty is fostering market volatility and what this means for investors navigating the complex landscape of tariffs, taxes, and broader economic policies.
Trump’s Inauguration and Executive Actions
Timestamp: [00:00]
Michael Zesas opens the episode by contextualizing the recent inauguration of Donald Trump as President of the United States and the subsequent flurry of executive orders aimed at reshaping trade policies. He emphasizes the immediate influx of investor inquiries seeking clarity amidst the "myriad executive orders" and press questions that analyze potential signals within the administrative noise.
“...investors who are trying to parse the meaning of myriad executive orders and answers to press questions looking through that noise for signals...”
— Michael Zesas [00:00]
Zesas underscores the significant influence of U.S. public policy on the global economic outlook and market trajectories. He cautions that even well-forecasted policy changes may not consistently align with market movements due to inherent investor confusion and speculative discourse surrounding the administration's strategic intentions.
Trade Policy Uncertainty and Tariff Strategies
Timestamp: [00:45]
A central theme of the discussion is the uncertainty surrounding trade policies under the new administration. Zesas highlights President Trump's "America First Trade policy," which mandates a comprehensive governmental approach to reducing trade deficits and addressing economic and national security concerns. Tariffs emerge as a primary tool in this strategy, with the administration directive to explore a range of regional and product-specific tariff options.
“...the President appears to be maximizing his optionality to levy tariffs when and how he wants.”
— Michael Zesas [01:30]
Zesas explains that while no new tariffs were immediately enacted, the administration's approach is to maintain maximum flexibility in applying tariffs as deemed necessary. This tactic involves making various tariff outcomes plausible, thereby keeping investors on edge and amplifying market volatility.
Market Volatility Driven by Tariff Announcements
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The potential for short-term market volatility is a significant concern addressed by Zesas. He notes that public statements regarding tariffs on key trading partners like Mexico, Canada, and China can lead to fluctuating investor sentiments, even if some tariffs do not materialize.
“...that maximize his optionality can drive all sorts of short term outcomes.”
— Michael Zesas [02:05]
Although the current outlook suggests that tariffs on Mexico and Canada are unlikely to proceed, the mere threat of such measures is enough to instigate uncertainty and risk aversion among investors. This environment prompts rapid shifts in market sentiments, reflecting the heightened sensitivity to trade policy developments.
Implications for the U.S. Treasury Market
Timestamp: [02:40]
Transitioning to the impact on financial markets, Zesas discusses the specific implications for the U.S. Treasury market. His analysis, supported by colleague Matt Hornback, suggests that the overarching tariff strategy and related policies are expected to contribute to slower economic growth projected for 2026. Consequently, treasury yields are anticipated to trend downward by the end of the year, although interim fluctuations are likely.
“...we expect treasury yields will ultimately end the year lower, but along the way they could certainly move higher.”
— Michael Zesas [02:40]
Zesas explains that the threat of tariffs can heighten concerns about temporary inflation, influencing markets to anticipate a more restrained pace of Federal Reserve interest rate cuts. This dynamic is particularly relevant for shorter maturity yields, which may experience upward pressure in the near term due to investor reassessment of inflationary risks.
Investor Strategies and Considerations
Timestamp: [03:00]
In concluding his analysis, Zesas advises investors to incorporate U.S. public policy developments into their medium-term market outlooks. However, he cautions against expecting market movements to mirror policy trajectories seamlessly, given the potential for significant short-term volatility driven by policy uncertainty and speculative rhetoric.
“...investors should be carefully considering US Public policy choices when thinking about the medium term direction of markets, but they should also expect considerable volatility along the way...”
— Michael Zesas [03:00]
This strategic approach involves maintaining flexibility and resilience in investment portfolios to withstand the anticipated oscillations while keeping an eye on the broader policy-induced economic shifts that may ultimately dictate long-term market directions.
Conclusion
Michael Zesas wraps up the episode by reiterating the critical importance of understanding and anticipating the impacts of trade policy and executive actions on market dynamics. He underscores that while the administration's policy path will significantly shape economic and market outcomes, the journey to those endpoints will be marked by periods of uncertainty and volatility.
“...the short term path can look a lot different from the ultimate destination.”
— Michael Zesas [03:00]
Zesas encourages investors to remain vigilant and informed, emphasizing the need to balance medium-term strategic planning with an awareness of the immediate, often unpredictable market reactions to evolving policy landscapes.
Disclaimer
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A brief disclaimer follows, clarifying that the podcast content is informational and not intended as financial, legal, or tax advice. It advises listeners to consider their personal financial circumstances and objectives before making investment decisions.
“The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice...”
— Host B [03:05]
End of Summary
This comprehensive summary encapsulates the key discussions and insights from Morgan Stanley's "Thoughts on the Market" podcast episode, providing a clear and detailed overview for those who have not listened to the full episode. By highlighting significant quotes and timestamps, it ensures that readers can grasp the critical points and strategic implications of President Trump's executive orders on market volatility and economic projections.