Q1 2025 Market Commentary: First Year Test for Presidents Trump & Musk

This information is meant to be a commentary regarding Consilio Wealth Advisors’ views on the relative attractiveness of different areas of the market, contrasted with our current asset allocation strategy for the near term, 12-18 months.

These views are always made in the context of a well-diversified portfolio and are not meant to be a recommendation to buy into or sell out of a particular area of the market. These views can and will change as new information becomes available, and we will periodically update this brief to keep you informed of changes.

We’re having a little fun with the title and acknowledge that politicians have always been influenced by powerful CEOs. The relationship between Donald Trump and Elon Musk is out in the open with a line of CEOs waiting to curry favor with Trump. With Trump and Musk both being so vocal, there’s going to be a lot of political noise that most investors should ignore.

Musk donated $277 million to Trump’s candidacy and that investment has paid off handsomely. Musk’s fortune has nearly doubled since the election and stands at $430 billion. Co-president Musk’s goal is making government more efficient and save trillions of dollars in spending.

Musk was successful in killing a spending bill that passed the House of Representatives. It was a bipartisan vote that initially passed a stopgap funding bill that would keep the federal government open for several months. Musk’s discontent was very public as he tweeted his opposition, hours ahead of Trump himself chiming in.

Year in Review

This year felt like a tale of two halves, pre- and post-election. The market leading up to the election was abnormally calm and trending up. Then as the election was called, optimism was pricing in for most asset classes. Winners and losers were making themselves apparent. Initially, it looks like financials and energy would be winners. International stocks and healthcare stocks have been initial losers.  

But the tale of two halves is more based on feelings and optimism for a Trump win. More fallacy of attributing presidents to stock market performance. Not much has changed since the election and much will not change over the next few years. Prices will remain elevated, and inflation will remain stubbornly sticky.

Inflation is above the Fed target at 2.7% and is higher if we strip out food and gas prices at 3.3%. Gas prices have fallen significantly last year because Chinese demand has dropped off. The lower gas prices are pulling down inflation in a temporary sense. A cynic would point out 3.3% as the true measure of inflation even though we’re enjoying lower gas prices. To get down to 2%, the Fed would need to keep interest rates in restrictive territory. The problem is multi-pronged where the Fed has this one tool in its toolbox. The other big lever is government spending.

Under Trump, there’s going to be an increase in spending despite naming Musk as the government efficiency czar. Extending the Tax Cuts and Jobs Act will increase the national debt by an estimated $4.5 trillion through 2035.

DOGE leader, Musk, figures we can cut $2 trillion in yearly spending to get us back into surplus. While his plan is unclear, Musk already has influence in government spending. Whether he can find $2 trillion by making government more efficient remains to be seen. We can all agree that the federal government is bloated and can get much leaner. However, serious cuts need to be made to close the spending deficit. That would potentially include Social Security, Medicaid, and military spending, and we’re not convinced congress would be willing to reduce spending in any of these categories.

As soon as the election was called, there was exuberance in the stock market, particularly in the overlooked parts, i.e. anyone but the Magnificent 6. See what I did there? Tesla is in another stratosphere, gaining over 77% in just a few weeks.

Tesla wasn’t the only winner following the election. We saw small caps, financials, energy, and bitcoin all charge higher.

Using the Russell 2000 index, which represents small cap companies in the US, you can see that there was a jump right after the election only to come back down to trend.

The Russell 2000 nearly caught the S&P500 due to the expectation of looser regulations, but the reality of higher interest rates soon took over. Trump’s win also implies an economic boost that could push inflation higher, therefore rates would need to remain higher to combat said inflation. Higher rates are better for bigger companies with large cash piles where they can earn interest and pay very little debt. Smaller companies tend to have much less cash and higher levels of debt, making higher rates prohibitive to making as much money.

The bond market is forecasting that rate cuts will settle at 4% which is a stark difference from the initial Fed goal of 3%. In the December meeting, the Fed conceded that the rate of cuts needs to slow from four more (1.00%) to just two more (0.5%). Every rate sensitive asset fell on the revised forecast.

Going back to the Russell 2000, the index dropped ~6% on the day the Fed announced the slowdown in rate cuts. Loose regulation alone won’t be enough to boost smaller cap companies. If borrowing costs remain elevated, it will be more expensive to run these businesses. The Trump 2.0 rally has already fizzled out for small caps because the market is putting greater weight on higher rates compared to deregulation.

The story gets uglier for energy names. Deregulation could help the bottom line for these companies, but the group is down -5% since the election. Cheaper gas prices are great for the consumer, bad for oil companies. Biden is still president so history will show cheaper gas prices under his watch. But global demand has fallen off a cliff with China’s slowdown really starting to take hold. That’s been the bigger driver rather than presidential policies.

Financials are expected to have an easier operating environment with looser regulations. The group is up 30% year to date but are off their post-election highs. We think the rally here is more sustainable because the amount of deal making should improve. Banks and financial institutions should find quite a bit of relief compared to the last administration.

Looking Ahead

We’ve said we don’t think much will change over the next year. Examining policy decisions between Trump 1.0 and Biden, not much is different. (Other than Biden’s never-ending quest to forgive student loans.) Trump 1.0 tariffs were all kept in place by Biden and when enacted, we had very little inflation. The Fed has struggled to get inflation up to its 2% target. That’s right. UP! Throughout 2009 and 2010, the US experienced periods of negative inflation (deflation).

2009 ended with an average inflation rate of -0.33% and 2010 had 1.6% average inflation. Longer term, deflation is going to be the issue we need to worry about. Lower prices are a product of a slowing or stagnant economy.

In the chart above, when inflation drops below 0%, it’s a result of a severe recession. The most severe drop was -15% in 1921. Lower prices are a consequence of demand destruction. People couldn’t buy necessities because they had no money. Prices have dropped as a result. Businesses respond by cutting wages or laying off workers. No one wins in a deflationary cycle.

Despite the long-term trend with inflation, the Fed is focused on the now. Inflation at 2.75% is above their mandate of 2.0% so there’s another leg to go. If Trump 2.0’s policies are pro-growth, the Fed will leave rates higher to reduce demand.

The difference between Trump 1.0 versus Trump 2.0 is the inflationary environment. If he were to increase tariffs, we would expect to see higher prices. Consumers could respond by not buying as many foreign made goods and American manufacturing makes a comeback.

Onshoring is a pipe dream. Even with tariffs, American wage requirements are so much higher than the rest of the developing world so consumers here would still pay a higher price for American made goods. We haven’t discussed the need to rebuild factories, to find workers, and find companies willing to foot the bill.

We have seen what happened when the first round of tariffs was introduced. Many companies buttered Trump 1.0 up (Apple) and went away without any tariffs on Chinese made iPhones. Other companies rerouted their supply chains to funnel through non-tariffed countries. The result was very little tariff tax revenue and little demand destruction. We did have to subsidize farmers who got hit by Chinese tariffs in response to tariffs from Trump 1.0. The government added $21 billion in direct subsidies to farmers in response to tariffs from China. 

The shrinking workforce is an area of concern. Boomers will continue to retire in record numbers. The US doesn’t have enough able bodied or willing workers to backfill the vacancies. The problem is exacerbated by the combined immigration policies of Trump 1.0 and Biden. Trump 2.0 tariffs will be more of the same.

Japan has a notoriously tight immigration policy and has experienced a stagnant economy and deflation for the past three decades. Like the US, the native population has delayed or even forgone having babies. The result is an aging population without enough younger workers to backfill.

Under Biden, the number of deportations has hit a record high. This trend is expected to continue under Trump 2.0. The US is still growing in population with the biggest portion of that growth coming from immigrants. If this side is totally cut off, we’d expect population decline.

The Fear of Missing Out – FOMO

If the initial reaction of a Trump 2.0 win were a sign of where markets are heading, be skeptical of highflyers. 2021 experienced meme trading, SPACs, and NFTs. While the ride was fun on the way up, it was devastating on the way down. When the appetite for speculative investments goes up, the junkiest names tend to benefit. Look at Gamestop, AMC Theaters, and Blackberry all repeating behavior exhibited in 2021. All these companies are in decline, but they were boosted by loud voices on Reddit.

There’s going to be a lot of noise and none of it based on sound fundamentals. If you feel you need to scratch that itch, then scale down your exposure to speculative names. Assume that investing in these junk names that you’ll lose it all. Figure out what level you’re comfortable with and go speculate.

Your serious money should be unfazed by FOMO.

Good or Bad Vibes

Consumer sentiment has been poor since Covid and that’s mostly due to high prices. Even considering wage gains and good economic growth, people did not feel good about the economy over the last four years.

We find these surveys don’t hold much weight from a market point of view. Case in point, the amount of republicans feeling good about the economy has jumped. The opposite reaction came from democrats, who suddenly don’t feel good about the economy anymore. Whatever side you’re on, your money doesn’t care. Stay the course. Don’t be fearful or exuberant.

The sentiment in the survey above shows people put way too much weight on the president and his impact on the economy. At least with the survey responders. Our readers know better.

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The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

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