Podcast Summary: "The Many Potential Policy Paths of Trump’s Second Term"

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: The Many Potential Policy Paths of Trump’s Second Term
• Release Date: December 23, 2024
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

Introduction

In the December 23, 2024 episode of Thoughts on the Market, Morgan Stanley hosts Michael Zezas, Global Head of Fixed Income and Thematic Research, and Ariana Salvatore, U.S. Public Policy Strategist. The episode delves into the potential policy directions of President Donald Trump's second term and explores the implications for investors and the broader market.

Overview of Trump’s Policy Plans

Ariana Salvatore initiates the discussion by outlining the key policy areas to monitor under the Trump administration's second term. These include:

• Tariffs
• Taxes
• Immigration
• Deregulation

Key Insights:

• Incremental Approach: Salvatore emphasizes that President Elect Trump's appointments, such as Scott Besant as Treasury Secretary, suggest a gradual and incremental approach to policy implementation. This is evident in their "fast decisions, slow implementation" framework, where major policy changes are announced quickly but executed over a longer period (00:35).

• Legislative Constraints: With Republicans holding a slim majority in the House of Representatives, the administration faces logistical, legal, and political hurdles that could affect the pace and extent of policy enactment.

Base Case for Investors

Michael Zezas transitions the conversation to the implications of the projected policy paths on the market and economic growth.

Economic Growth Pressure on a Lag:

• The policies outlined are expected to exert downward pressure on economic growth, but these effects are anticipated to manifest later in 2025 and into 2026 (02:15).
• Positive Market Backdrop for 2025: Despite potential growth pressures, the immediate outlook for 2025 remains favorable, supporting risk assets and equities. Bonds also benefit from this outlook as concerns over US deficits appear less severe than media narratives suggest.

Notable Quote:

"Extending current tax cuts with a few sweeteners on top is primarily an extension of existing policy, rather than a substantial expansion of deficits," Zezas explains (03:00).

Bond Market Dynamics:

• Markets are likely to reassess deficit expectations, recognizing that extending tax cuts does not equate to a significant increase in deficits compared to merely allowing them to expire.

Potential Risks and Key Signposts

Ariana Salvatore highlights the inherent uncertainties embedded in the policy paths and identifies potential risks that could deviate from the base case.

Risks to the Base Case:

• Accelerated Implementation: If tariffs or other policies are enacted more swiftly and extensively than anticipated, this could dampen economic growth sooner than expected, negatively impacting risk assets and equities (04:08).

• Congressional Actions: Should Congress grant more authority to the executive branch, particularly regarding tariff implementation, it could lead to more aggressive policy measures that surpass the current expectations.

Positive Indicators:

• Balanced Policy Sequencing: If Congress pursues substantial tax cuts while the executive branch negotiates to delay or moderate tariff implementations, it could create a more favorable environment for corporate earnings, consumption, and GDP growth, thereby supporting risk assets.

Notable Quote:

"There's a lot to keep an eye on between now and Inauguration Day," Salvatore remarks, emphasizing the dynamic nature of policy developments (05:00).

Investor Strategy and Conclusion

Michael Zezas concludes by suggesting that investors maintain a cautiously optimistic stance, leveraging the current growth backdrop while remaining vigilant for policy-induced shifts in economic conditions.

Strategic Takeaways:

• Long-Term Vigilance: Investors should monitor policy announcements closely, especially those related to tariffs and tax reforms, to adjust their portfolios in response to evolving economic forecasts.

• Balanced Allocation: Given the potential lag in economic growth pressures, a balanced investment approach that includes risk assets and bonds could be advantageous in the near term.

Closing Remarks: The episode wraps up with a reminder from the hosts to rate and review the podcast and share insights with peers, underscoring the importance of staying informed in a rapidly changing policy landscape.

Notable Quotes with Timestamps:

• Ariana Salvatore [00:35]:
  "His pick for Treasury Secretary, Scott Besant, is a good example that gives us conviction in a more gradual, incrementalist approach to tariffs."

• Michael Zezas [02:15]:
  "The policy path we're describing exerts pressure on economic growth, albeit on a lag."

• Michael Zezas [03:00]:
  "Extending current tax cuts with a few sweeteners on top is primarily an extension of existing policy, rather than a substantial expansion of deficits."

• Ariana Salvatore [05:00]:
  "There's a lot to keep an eye on between now and Inauguration Day."

Conclusion

This episode of Thoughts on the Market provides a comprehensive analysis of the potential policy trajectories under President Trump's anticipated second term. By outlining the "fast decisions, slow implementation" framework, Salvatore and Zezas offer valuable insights into how these policies may influence economic growth and market dynamics. Investors are advised to stay alert to policy developments and adjust their strategies accordingly to navigate the evolving landscape effectively.