Donald Musk vs Elon Trump
Markets were extremely pleased by the election of Donald Musk at the beginning of November but are now starting to take the risks associated with Elon Trump more seriously.
The S&P 500 US equity index has thus fallen by over 3% (as at 2 January 2025) since 16 December. Meanwhile Tesla, which skyrocketed 80% between the presidential election and 16 December, has since lost 18%.
Of course, this disenchantment is not solely due to fears linked to the economic policy of the President-elect. It is also partly due to the less accommodative stance adopted by the US central bank. The Fed did announce a cut in its key rate of 25 basis points at its 18 December meeting, but this move was accompanied by a prudent stance on any future cuts. The Governing Council now only expects two further rate cuts by the end of 2025. Far from offering the prospect of a swift normalisation of the key rate towards its long-term target, the Federal Reserve now sees it at around 3.9% at the end of 2025, partly as a result of expected inflation remaining higher in 2025 than had been hoped for back at the September meeting. The markets had no option but to react negatively to this news.
But why is the forecast level of inflation now higher? Recent inflation data does not clearly indicate a particularly punishing level of inflation in 2025. On the contrary, a number of factors should help to lower it, particularly the lull in real estate prices, the gradual easing of the employment market, and the weakening oil price currently, which is expected to be sustainable. The implication is thus that the less favourable expectations for inflation are at least partly due to assumptions about the President-elect’s future economic policy. Of course, Fed Chair Jerome Powell has countered any speculation on this issue. But the simple fact that the incoming President’s programme risks fuelling inflation will of course affect monetary policy expectations. This may be one of the concerning consequences of Trump’s programme worrying the market.
Other negative aspects of Trump in power may also have played a role in the market’s disenchantment. This is particularly the case regarding the deep divisions marking the presidential camp and which are now on full show. They presage extreme instability in future policies. The first episode of serious tension in the Republican camp came on 19 December with the rejection by the House of Representatives – where the Republicans have a majority – of a budget proposal presented by Trump but clearly remotely controlled by Musk. This rejection pushed the country to the brink of a federal government shutdown. An amended version was adopted at the last minute in return for serious concessions on the most obviously Musk-inspired elements of the budget. Yet this didn’t stop the disarray of the party, which was subsequently evident on the immigration issue. Some Trump supporters want to prohibit recourse to H-1B visas, which are intended to facilitate immigration for foreigners with rare professional skills. This initiative sparked the anger of Elon Musk, who declared himself ready to go to war to protect their use as a vital tool for the innovation economy, whereas Steve Bannon, a long-term Trump supporter only recently released from prison, told Elon Musk to “sit in the back and study” until he had properly understood Trumpism.
These deep divisions could last while Trump tries to juggle the interests of Silicon Valley billionaires and those of rednecks from the Midwest. Votes on crucial measures – and in particular the budget – could therefore end in gridlock, which the market would be sure to penalise. Watch out for parliamentary crashes aboard the Trump Tesla!