As an investor, you are preparing yourself for what 2025 has in store. Donald Trump is set to return to the presidency, and many believe that this poses some uncertainty as to how his leadership and policies will affect the markets. In addition to trade wars, there are also concerns about inflation. Moreover, Trump’s propensity to make off-the-cuff decisions often disseminated through social media give investors a feeling of standing in a queue waiting to be served, unsure how to prepare their strategies.
Why Trump’s leadership style makes markets unpredictable
Trump is known for his spontaneous and often unconventional way of handling policy decisions. In his previous term, we saw how tweets about tariffs or trade deals could cause immediate market fluctuations. This off-the-cuff style makes it hard for investors like you to anticipate what might come next.
- Policy by tweet: Trump’s use of social media to announce key policies, particularly on trade, created a lot of market volatility in 2018. Many expect a repeat in 2025.
- Mixed signals on trade and tariffs: Trump’s statements often leave room for interpretation, making it challenging to prepare for the ripple effects on markets.
The unpredictability is compounded by the fact that Trump’s policies often prioritize short-term impact over long-term economic strategies.
How tariffs could affect the economy in 2025
As Trump is about to take over, a lot of businesses are concerned about Tariffs. Here is how tariffs works if you are not familiar with it:
- Tariffs actually are taxes levied on goods imported into the country.
- These tariffs are often referred to as “tariff on China”. Ultimately, however, the cost of paying for these products is borne by the U.S. importing companies which would transfer this cost to you, the consumer.
With his previous presidency, Trump really did not put much thought into the dollars and cents that his trade wars – and primarily with China-increased costs for American households and businesses. If this repeats in 2025, we may see:
- Higher inflation: Tariffs have a tendency to increase the prices of everyday goods, making living more expensive.
- Reduced growth: Rising costs among businesses will lead them to less hiring or to invest less, thereby slowing the economy.
As Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, puts it, “It is hard to argue against tariffs being inflationary while also suppressing growth.”
Why concerns about stagflation are reemerging
If you have been hearing the term “stagflation” more often, you are not alone. This concept, which describes a period of high inflation and low economic growth, is becoming a real concern for 2025.
Several factors could contribute to stagflation under Trump’s policies:
- Trade wars and tariffs: As mentioned earlier, these can drive up inflation while limiting growth.
- Mass deportation policies: Trump’s proposed plans for deporting undocumented workers could disrupt key industries like agriculture and construction, driving up labor costs and reducing economic output.
The result? A tough environment where costs keep rising, but the economy struggles to grow.
Should you adjust your investment strategy in 2025?
If you are considering making major changes to your portfolio based on Trump’s return to the White House, experts advise caution. Liz Ann Sonders notes that trying to predict market reactions to political developments can be a “fool’s errand.” Instead, she recommends sticking to the basics:
- Diversify your portfolio: Spread your investments across different asset classes to reduce risk.
- Focus on your long-term goals: Avoid reacting to short-term market swings or political news.
- Review your financial plan: Ensure your strategy aligns with your retirement or savings goals.
How retirees can prepare for market uncertainty
If your retirement is near, the market’s movements can be especially disturbing. Here are some practical steps you can take to safeguard your financial future:
- Keep a cash reserve: During times of market volatility, having a few months of living expenses in cash can help you ride it out.
- Rebalance your portfolio: Invest according to your tolerance and your horizon.
- Talk to a financial advisor: Get some help from a professional who will understand your current situation.
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