How financial markets will check Trump’s ambitions – and other reassuring thoughts as he returns to power

Are you suffering from Trump Return Syndrome? Those of us afflicted with the disease know the symptoms: Disturbed sleep. The urge to shout obscenities at the television. A growing fear of red ball caps.
But there is hope. Even if you are struggling to make sense of a world in which a hate-spewing felon regains power with the enthusiastic endorsement of U.S. voters, you can still find your way to inner peace.
Three thoughts can help. The first is that this election may not mean what you think it means.
Rather than signalling a permanent swing to the right among voters, last week’s U.S. election result may simply be another chapter in the slaughter of incumbents that is taking place around the world.
No need to be dainty in describing this trend: Just about every government that was in power during the Great Inflation of 2022 and 2023 is getting mauled in the polls.
In recent months, the British Conservatives suffered a devastating defeat after 14 years in power, France’s ruling coalition lost a third of its parliamentary seats and Japan’s long-ruling Liberal Democratic Party endured the second-worst defeat in party history.
“Almost everywhere you look in the world of affluent democracies, the exact same thing is happening,” writes Matt Yglesias, the U.S. political pundit. “The incumbent party is losing and often losing quite badly.”
He notes that these defeats aren’t a left-or-right thing. Centre-right governments in Australia and Belgium have lost, so have centre-left governments in Sweden and New Zealand.
The only obvious common denominator among the losers is incumbency. Voters are in a foul mood and taking it out on those in power.
Why? One plausible explanation is that people hate inflation and are still seething from the runaway price increases of 2022 and 2023. Economists can point out it is difficult to blame any single national government for a global surge in inflation; analysts can add that wage increases for many workers are now catching up to or even surpassing higher prices. However, none of that seems to matter in the voting booth. Many people – especially lower-income people – are spitting mad at the powers that be.
The widespread desire to throw the bums out was demonstrated in recent Canadian by-elections by the emphatic rejection of the now grotesquely unpopular Liberals. In the United States, the same anti-incumbent trend predicted a shattering defeat for Democrats last week.
Maybe, then, the correct take on the U.S. election isn’t surprise that Donald Trump won, but surprise that Kamala Harris did as well as she did. That is a consoling thought, because it suggests a more normal political balance will be restored once we move further away from the inflationary surge of the pandemic.
This notion also leads on to a second calming thought: The strong possibility that financial markets will be an effective control on Mr. Trump over the next couple of years even if the beaten-up Democrats can’t offer much in the way of pushback.
Financial markets matter because the situation that the once-and-future president steps into now is radically different from the one he was handed when he won the presidency for the first time in 2016.
Back then, Mr. Trump inherited a dream situation, one with ample room to manoeuvre. The U.S. economy was growing at a moderate 2.2 per cent a year clip with low inflation, falling unemployment and a modestly valued stock market. The budget deficit stood at 3 per cent of output – a bit high by historical standards but a huge improvement from the 8-per-cent-plus deficits of the financial crisis.
Mr. Trump attempted to goose growth by swelling the budget deficit with tax cuts. However, even with that added stimulus, the difference between economic growth in the first three years of his term – before the pandemic struck – and the rate of economic growth under his predecessor, Barack Obama, is hard for the naked eye to discern.
(To be precise, gross domestic product growth in Mr. Obama’s second term was 2.33 per cent a year. In Mr. Trump’s prepandemic patch, it was 2.67 per cent a year. His record drops to a lacklustre 1.45 per cent if you include the final pandemic-plagued year of his presidency.)
How about now? The second-time president is facing a considerably riskier situation. He is taking charge of a hot economy that is growing at a 2.7-per-cent annualized pace with inflation that is falling but still above target. Stocks have soared to some of their most expensive valuations in U.S. market history, while the budget deficit has gaped to more than 6 per cent of output – a remarkably high shortfall for a prosperous, peacetime economy.
This is not a situation that leaves a lot of room for big moves, especially for someone who prides himself on stock market performance as much as Mr. Trump does.
If he tries to pass the sweeping tax cuts he has promised, he will swell the already enormous deficit. Bond buyers might well demand higher interest rates to finance the supersized budget gap, and those higher interest rates would not be good for the federal budget or for stock prices.
Much the same holds true for Mr. Trump’s vow to deport millions of immigrants in the country illegally or to impose tariffs on all types of imports. Any move in either direction would likely add to inflation, drive up bond yields and challenge the stock market’s recent gains.
There is a good chance, therefore, that Mr. Trump’s big rhetoric will shrink when it meets reality – not because he has had a change of heart, but because financial markets will balk at some of his notions.
This underscores a third comforting thought: Mr. Trump’s long history of ineptitude. He inherited a real estate fortune from his father and proceeded to drive half a dozen hotel and casino companies into bankruptcy. He tried to start a pro football team and a university. Both ventures ended in failure.
His first term as president was a shambolic affair in which he attempted to buy Greenland and recommended injecting disinfectant to help treat COVID-19. When he lost the 2020 election, he couldn’t even plot a proper coup d’etat.
Astonishingly, Mr. Trump is now back in power. He has threatened frightening acts – mass deportations and the use of the military against “the enemy from within.” But pulling off such acts would require careful planning and cunning. If history is any guide, he will screw it up. Or at least we can hope.