What Trump’s First Presidential Term Says About What’s Ahead?

What Trump’s First Presidential Term Says About What’s Ahead?

AGF Investments Inc.’s U.S. Regime Model shows his policies had significant economic effects, notably through tax reform and trade initiatives. 

After Donald Trump won the U.S. presidential election on Nov. 5, U.S. stock markets surged, and probably for a few reasons. For one, the convincing Republican victory – the party of Trump also carried the Senate and the House of Representatives – erased any uncertainty that had hovered over markets for months during the campaign. For another, investors clearly expect Trump as President will introduce pro-growth policies centered around tax cuts and deregulation. Of course, only time will tell if those expectations become reality. In the meantime, how can investors begin to parse the likely macroeconomic impact of the U.S. power shift?

To find an answer, we turn to AGF Investments Inc.’s U.S. Regime Model, which is designed to help portfolio managers and analysts navigate complex macroeconomic environments by interpreting thousands of data points on growth, inflation and market conditions. It classifies the economy into four regimes: Reflation, Defensive, Inflation and Goldilocks, assigning probabilities to each regime and providing actionable insights that guide asset allocation and portfolio strategies.

What makes our U.S. Regime Model unique is its forward-looking capability, offering a three-month regime forecast with solid accuracy. It also allows for near-neighbour analysis, where today’s economic data is compared to historical analogues.

This approach helps develop playbooks to navigate periods of uncertainty and proved invaluable in the post-COVID-19 period, when the U.S. Federal Reserve (Fed) drastically shifted its monetary policy from extremely loose conditions to a tightening stance aimed at curbing inflation. In response to rising inflation, driven by supply chain disruptions, labour shortages and strong consumer demand during the pandemic, the Fed undertook a series of aggressive rate hikes. Between March 2022 and July 2023, interest rates were raised 11 times, moving the target rate from near-zero to 5.5%, totaling 525 basis points over approximately 16 months.

More recently, the key question we faced was whether the U.S. would experience a recession or something less severe this past year. To address this, our near-neighbor analysis pointed us to the mid-1990s, which served as a strong historical analogue – particularly in terms of the Fed’s "soft landing" and rate pivot strategy. Between 1994 and 1995, the U.S. central bank raised interest rates seven times, from 3% to 6%, followed by three rate cuts totaling 75 basis points. For over two years (1996-1998), rates remained elevated at around 5.25%-5.5% without triggering a recession. During this period, the U.S. economy was in Goldilocks and Reflation regimes, both of which were favorable for equities in a risk-on environment. From January 1, 1996, to December 31, 1998, the S&P 500 Index outperformed the Bloomberg U.S. Aggregate Bond Index by 62%.

This analysis provided us with confidence that the U.S. was in a similar "higher for longer" rate environment that could be positive for equities and global credit markets, while challenging for conventional government bond yields – all without triggering a recession. Indeed, this proved accurate, as rate hikes were followed by delayed cuts only when the Fed was comfortable with inflation levels. From April 1, 2024, to October 31, 2024, the S&P 500 outperformed the Bloomberg U.S. Aggregate Bond Index by 5.9%.

Fast forward to today, as Donald Trump prepares to begin his term as the 47th U.S. President, we analyzed his first term to anticipate the regime the U.S. may be entering in 2025. During Trump’s first go-around, his policies had significant economic effects, notably through tax reform and trade initiatives. The 2017 Tax Cuts and Jobs Act provided substantial tax relief for corporations and individuals, spurring economic growth and market confidence while contributing to inflationary pressures. The trade war with China, marked by tariffs and counter-tariffs, further increased concerns about the rising cost of goods and disruption in trade flows. During this period, the U.S. was in a Reflation regime – marked by higher growth and higher inflation – and equities significantly outperformed bonds. From Jan. 1, 2017, to Dec. 31, 2018, the S&P 500 outperformed the Bloomberg U.S. Aggregate Bond by 7.9%.

As we approach 2025, there is anticipation that a lot of Trump’s prior economic strategies will resurface, potentially creating a similar macroeconomic environment to his earlier presidency. Deficit spending, tax cuts, and tariffs, central features of his previous policies, are expected to be reinstated, potentially leading to inflationary pressures similar to those seen in 2018. If President Trump 2.0 follows a similar path, the U.S. may again enter a Reflation regime, prompting the U.S. Federal Reserve to respond with rate hikes to manage inflation – just as it did during Trump’s first term. Of course, the risk is real that the regime model could move quickly from Reflation to Inflation, as it did in the second half of Trump’s first term. Then, the economy started to overheat, inflation made a U-turn higher, and the Fed moved from cuts to hikes.

Against this backdrop, rising interest rates alongside strong real GDP growth do not necessarily derail markets. In fact, when the U.S. Federal Reserve manages this balance effectively, it can create a positive environment where equities outperform bonds, supporting overall market resilience and growth.