Happy May 4th to everyone or should I say happy Star Wars Day (“May the 4th Be With You”). I’m a fan of the Star Wars movies and my wife vetoed me on naming our second twin Han. I wanted to be the Dad at the playground shouting “Luke, Han, time to go home”. In the end we agreed on Luke and Mason as our sons’ names, with Mason’s name taken from a character in a TV show called Dead Like Me.
Since President Trump took office for his second term, he has implemented and suggested many policies that are looking to make America great again. In effect, the empire is striking back. So, what are the economic concerns that his policies are focused on, how the markets have reacted and how would I grade the achievements to date?
Trade Deficit B
The U.S. consumer has long been the growth engine of the world, with the U.S. routinely importing more than it exports. There are some quirks in the calculations, especially when looking at big tech, but the trend has been strong. In 2024, the U.S. imported around $1 trillion worth of goods more than it exported. The strong U.S. Dollar relative to other currencies around the world, has only made this worse (imports get cheaper, exports get more expensive).
The initiatives behind the tariff policy have been to rebalance these trades figures by making imports into the U.S. more expensive, thereby both choking off demand and making domestically manufactured goods relatively cheaper. So far, the noise and execution of tariff policy seems to have accelerated imports, as consumers and manufacturers front run policy by bringing forward their demand.
Inflation C-
As large part of the Trump campaign was focused on reducing inflation. Inflation is a tax on those without wealth. Inflation tends to lead to increases in asset prices (adding to wealth) but reduces the purchasing power of income. Therefore, the lower and middle classes are hit much harder than those that are asset rich. So far, market expectations of lower inflation haven’t occurred with expected inflation sitting at elevated levels. The market has been switching concerns around heightened inflation (from tariffs and lower immigration) alongside the potential demand decreases prevalent during a recession.
Bond Yields B-
Trump and his Treasury Secretary, Scott Bessent, have both made it clear that they would like to see a lower yield on 10-year maturity U.S. government debt. They have a few clear reasons to see this play out but most importantly because it reflects the cost of government debt. The U.S. Treasury currently owes $36 trillion, which at today’s market rates incurs over $1 trillion per year in interest expense.
The bond market initially favored the pairing of Trump and Bessent with lower U.S. government bond yields. However, amongst the tariff announcements there seemed to be global outflows from debt, pushing yields higher at a rapid rate. In fact, the move was so violent in early April, many worried we were seeing a Liz Truss like moment, pointing to how the U.K. bond market reacted to the first and only budget proposal under her time as the Prime Minister. Bond yields are down from the time Trump was elected but with very high levels of uncertainty.
US Dollar A
A strong U.S. Dollar has been one of many factors to blame for the building trade deficit the U.S. is faced with. As the Dollar was strong, it allowed for cheaper imports while making exports more expensive, exacerbating the problem. However, with current account deficits, there needs to be a capital account surplus. Excess Dollars that were used to pay for exports were largely recycled back into U.S assets through financial markets.
Recently we have seen capital flow out of the U.S. (both equities and bonds) pushing down the value of U.S. Dollars and leading to an appreciation in most other currencies. Safe havens such as Swiss Francs, Japanese Yen or the big winner, gold have appreciated as foreigners sell assets. The weaker U.S. Dollar (shown below versus trading partners) should help alleviate the trade deficit but has maybe taken the shine off owning U.S. assets.
source: Finviz.com
It’s been a difficult time for global investors who have been used to the U.S. markets offering a safe haven amongst storms. Traditionally the losses on assets were offset by gains on both U.S. Dollars and U.S. Treasuries.
All in all, from a markets perspective the report card isn’t terrible. It will take time to understand the longer-term implications of all the noise on business investment and hiring decisions. The second order effects are usually more severe and longer lasting.
Will we see the Return of the Jedi or are there signs of A New Hope? Happy Star Wars Day all, especially from someone that gets to walk around the house stating, “Luke, I am your father”.
My very best,
Stephen Harvey
Chief Investment Officer
Sagard Wealth
