Trump’s day one executive orders are a shot across the bow for America’s enemies, but actual market impact is uncertain

President Donald Trump kicked off his second term with a flurry of executive orders designed to streamline the bureaucracy, reduce consumer prices, and inform America’s trading partners that their trade policies would face extreme scrutiny.

In a sense, Trump’s unilateral actions show the president’s commitment to following through on his far-reaching campaign promises. Although some of his orders will have an immediate impact, others are symbolic gestures designed to nudge the country in the right direction.

Financial markets are caught somewhere in the middle. Stocks are broadly higher since Inauguration Day, but investors have serious questions about how Trump’s economic policies will impact their portfolios.

Underpinning Trump’s executive orders is a broad list of “America First Priorities,” which are grouped under the buckets of public safety, affordability and energy independence, reducing government waste, and promoting American values.

JPMorgan’s chairman of market and investment strategy, Michael Cembalest, called these priorities a “hodgepodge of distinctly American political strains.”

America First sounds good for Trump’s allies, but this policy framework creates “risks for investors since its supply-side benefits collide with its inflationary tendencies,” said Cembalest.

In this environment, “there’s not a lot of room for error at a time of elevated US equity multiples,” Cembalest said, referring to the extremely elevated status of US stock prices.

The JPMorgan wealth adviser forecasts a volatile year for stocks based on the recent performance of the 10-year US Treasury.

The other problem? There’s “not enough negative information at this time to change strategy in portfolios positioned for continued US growth and outperformance, particularly given a more benign tariff rollout,” he said.

Which executive orders should investors be worried about?

For investors, the most pressing executive actions are those involving international trade, business, and the economy.

The directive that all executive government agencies “tailor their policies to reduce consumer prices” is at the top of the list. Trump has called on the White House to deliver a progress report on inflation in his first 30 days.

Although it’s hard for the executive branch to control inflation, there are a few ways Trump can follow through on his promise. It begins with the phrase, “drill, baby, drill.”

Trump repeated this phrase during his inauguration speech, referring to the tidal wave of American oil that’s about to flood the market once he deregulates the energy sector and puts an end to “climate extremism.”

Here, Trump can have an immediate impact, since elevated oil prices have been a big driver of America’s multi-year battle with inflation.

Economists also say Trump’s deregulation agenda will extend to other industries, presumably to make it easier for businesses to enter the market, compete, and bring prices down.

“It’s going to be energy, deregulation, and driving down waste in government spending to free up scarce resources,” said National Economic Council chief economist Joe LaVorgna.

However, like many things with Trump, things aren’t always what they seem. His promise to reduce inflation clashes with his renewed threats to the Federal Reserve to lower interest rates.

Trump recently said, “I’ll demand that interest rates drop immediately. And likewise, they should be dropping all over the world. Interest rates should follow us all over.”

It doesn’t take an economics degree to know that aggressive rate cuts can lead to more inflation, especially after four years of elevated prices.

According to Moody’s Analytics chief economist Mark Zandi, allowing Trump to meddle with interest rates would create a far bigger problem than just inflation.

“Allowing the president, any president, to help set monetary policy would eventually wreck the U.S. economy,” said Zandi, who referred to President Richard Nixon’s disastrous rate-cut advocacy in the 1970s, which eventually triggered a massive inflationary tidal wave.

According to economist Peter Schiff, Trump 2.0 could inadvertently lead to Inflation 2.0, only this time it has nothing to do with interest rates but tariffs instead.

At least five of Trump’s day-one executive orders concerned trade. These included directing government agencies to “examine causes of U.S. trade deficits, identify unfair trade practices and make recommendations, potentially including “a global supplemental tariff.”

The president has already vowed to steepen tariffs against Canada, Mexico, and China.

For Schiff, “Trump’s take on trade deficits is all wrong.” Deficits don’t harm America, but instead help the country access cheaper goods from other parts of the world.

To make his point, Schiff singled out Trump’s complaint that America imports too much lumber and cars from Canada.

“Donald Trump specifically said we don’t need any Canadian cars, we don’t need any Canadian timber—of course, we do [...] America imports a lot of stuff from Canada—what does Donald Trump think would happen to the price of all that stuff? It would go way up,” said Schiff.

Schiff’s conclusion that tariffs would eventually harm consumers is well supported by the research. A pre-pandemic New York Fed study found that tariff revenues collected during Trump’s first term were insufficient to offset the losses incurred by consumers.

As Investors Observer recently noted, tariffs are especially bad for the stock market. According to another New York Fed study, U.S. stocks lost a combined 11.5% on days with tariff announcements during Trump’s first term.

From tariffs to lower interest rates and even mass deportations of illegals, “Everything Trump is doing is likely to cause higher inflation than there was in the last year of the Biden administration,” according to Mason University professor Jeremy Mayer.

The Trump 2.0 playbook

While financial experts generally agree that a second Trump administration will be mostly good for stocks, economist Alex Kruger says the days of “easy money” appear to be over.

Kruger was referring to the Fed announcing a “temporary pause” in its rate cut plans over inflation. Once again, the central bank is on a collision course with the new president, and the tug of war could continue if Trump tries to blur the lines between the Fed and the executive branch.

Against this backdrop, investors have few places to turn if they want to sidestep Trump-era uncertainty. According to Goldman Sachs, a portfolio that’s rich with tech, airlines, industrials, and financial stocks could be well-positioned to ride out a bumpy Trump term.

Goldman says these sectors are poised to benefit from Trump’s positive stance on mergers and acquisitions, tax cuts, and technological innovation.

Brown Advisory portfolio manager Eric Gordon said Trump’s priorities haven’t shifted very much compared to his first rodeo eight years ago. Because of this, investors can expect a brief period where smaller-cap stocks outperform their larger peers.

But Gordon cautioned investors not to expect this to continue indefinitely.

“Contrary to popular belief, the 2016 “Trump Trade” did not last for very long,” Gordon said, referring to the brief period where small caps dominated technology and large-cap stocks.

“Within 12 months of the election, large caps nearly caught up, while tech overtook financials and didn’t look back,” said Gordon.

Therefore, Trump 2.0 is likely to be a chaotic ride for investors, but they can draw some inspiration from his first term. However, the biggest difference between now and eight years ago is inflation.

Gordon and others believe that the “eventual consequences of [Trump’s] policies would be rising inflation, leading to a possible showdown with the Fed.”

If the Fed is forced to raise rates again, all bets are off.

“Rising rates would likely challenge the pro-cyclical tilt of the market as they would act as a headwind to economic growth,” said Gordon.