Hardy’s Macro View: Rule #1 for the Trump 2.0 market era.

What is the outlook now that we are back to flat on US equities in 2025?
TACO trade or not, many are breathing a sigh of relief after the disorienting volatility now that we have come more or less full circle since the beginning of the year, with US equities back to about flat on the year. Note that global investors are not as happy as US-based investors, as the major US equity indices are actually still down on the year in EUR terms and especially in JPY or CHF terms, as the US dollar has fallen.

With things a bit calmer after the bulls were burned from February into early April, and the bears were positively barbecued from the early April lows until mid-May, we should take stock of any lessons we can learn that will help us avoid excess drama in our portfolios. To help in this effort, I have come up with four axioms or “rules” for the Trump 2.0 era that can hopefully help investors and traders stay a bit safer in this environment. The first rule is:

Rule #1: Policy and market volatility are going to continue – embrace it.

Trump might “chicken out” at times, but the underlying policy moves are for real and a deadly serious shift in US economic statecraft and industrial policy that is a response to massive instabilities that have been growing for years.

Like his style or hate it, Trump is the first US president to take a serious stab at reversing the imbalances that the post-WWII system created, particularly since the mid-1990’s. For the last few decades, mercantilist powers like Germany, Japan, South Korea and above all China took advantage of the USD-based global order to keep their currencies artificially cheap to encourage a buildup of export-driven industrial capacity. The system required the US to run permanent large deficits to send enough US dollars for the world to use the US dollar as the chief global reserve currency. This allowed US to afford a high living standard, even as the setup drove a worsening inequality problem at home as manufacturing job disappeared, just as it drove a hollowing out the US industrial base.

Now, Trump is using tariffs, trade rules, and alliances as levers for American advantage, essentially playing the same game that mercantilist states have been playing, but now in reverse. Just because he takes 7 steps forward and 5 steps back doesn’t mean we aren’t going somewhere. And ironically, perhaps precisely at times when things have calmed down nicely, Trump feels emboldened to unleash a fresh policy initiative that sets everyone on edge all over again.

What does this mean for your investments and trading?

Make sure that you see the forest for the trees – the question is the speed with which, not whether we are detonating the old global order. Yes, Trump nearly always backtracks (TACO’s) on unrealistically strong policy moves to avoid excess immediate damage to market confidence, knowing that his legacy will “wear” the stock market performance under his time at the helm. But his chaotic style is forcing real change by economic players on the ground. Companies must now consider making huge and possibly expensive changes to diversify or reshore their supply chains that would never have been taken unless the Trump administration wasn’t cracking the whip. The speed is always a huge question mark in this new regime, but the direction of travel isn’t. Consider the single, if very large, case of Apple – which still produces most of its iPhones in China. Even as Trump carved out exceptions to eye-watering tariff levels it imposed on China to allow Apple to continue to export iPhones and other gear to the US at reduced levels, Apple announced that it would shift its production of iPhones to India. This sparked fresh Trump anger as he clearly wants those iPhones produced in the USA. A move to India is already expensive for Apple, but a move to the US would be far more so. And can Apple afford to lose market share by passing on all of those costs to its customers? Other companies will have to make similar considerations, but for especially critical industries that are needed. Which leads us to….

Figure out who will benefit. This transformation in US economic statecraft will likely not end up being across the board, but aimed mostly at specific, strategic industries that keep the gears of the US economy going around and its people comfortable for which the US cannot rely on far-flung or adversarial countries like China for supply chains. That is still a lot of industries – everything related to digital, pharmaceuticals, energy and all transport infrastructure (especially shipping, which China completely dominates), high tech and even basic industrial low-tech and if it is an input to any of the above. Only low value add industries like recreational goods and some textiles might largely escape US tariff focus. The US tariffs will mean higher costs and lower profit margins for some companies that need to invest in reshoring or diversifying their supply chains. But other companies might benefit from a protectionist umbrella that avoids the profit-destroying competition with especially Chinese companies that aren’t interest in profits but only servicing the Chinese mandate to control productive capacity. Think ship-building as per above, dual military-civilian technologies in chips and even shipping containers, nuclear energy, pharmaceuticals and strategic commodities like rare earths.

Realize that the Fed isn’t what it used to be: no more bailouts just to avoid volatility. Because of the massive uncertainty on growth and especially inflation that Trump’s economic and economic statecraft is generating, the Fed has been sidelined as it can’t provide the kind of support that it has provided at nearly every turn at least as far back as 1998 when it bailed out the notorious LTCM hedge fund. Excessive Fed easing only keeps alive operators in the economy that otherwise wouldn’t’ stay alive, and are therefore a dead weight, productivity drain on the US economy. As well, any Fed easing from here will likely have far more to do with keeping the US treasury market functioning smoothly and the US government able to pay its bills than at supporting asset market prices (even if the effect can at times be the same.) It’s hard to believe after the nearly three decades that the central banks were masters of the universe, but those days are over. We are in a new era of fiscal dominance, in which government policy is in the drivers’ seat – i.e., Trump and the Republicans are at the wheel. That will remain the case at least until after the US mid-terms in late 2026, and possibly beyond if the Republicans retain control of the House and Senate, and to some degree anyway as long as Trump maintains the ability to make significant policy moves like those on tariffs through executive order.

Stay tuned next week for Rule #2 of the Trump 2.0 market era.