Investing.com – Donald Trump's return to the White House could bring market instability in 2025, according to Piper Sandler, describing the economic situation as “a recipe for volatility.”
The investment bank made a comparison to the early 1980s, suggesting that Trump's return mirrors the conditions faced by Reagan when he took office, a legacy of inflationary pressure and policy inefficiency.
Piper points out that Trump will take office after years of fiscal stimulus and fiscal policies, similar to Reagan. Federal spending has increased, inflation remains sticky, and bond markets are already reacting.
“Bond watchers” have started to drive yields higher, anticipating that the Federal Reserve's latest tapering may have gone too far, too fast.
Piper notes that federal spending, which has jumped 10.4% year-on-year through 2024, continues to increase fuel prices, comparing this to rates that act as a one-time tax instead of persistent inflation. The firm stresses that tariffs “could raise relative prices even further,” but the impact of inflation pales in comparison to government spending that is not considered.
The company emphasizes uncertainty about fiscal policy under Trump. Federal spending patterns, the possibility of new tariffs, and questions about whether corporate taxes will remain low all add to market jitters. It warns that while possible repeals and tax cuts could boost output, the immediate concern is that Trump could go after the tariffs, which could bleed consumer spending power and boost markets.
Monetary policy is another flashpoint, with inflation showing signs of persistence as the Fed tries to ease. Meanwhile, geopolitical risks – ranging from US-China to conflicts in the Middle East and Europe – continue to complicate the outlook.
“Jitters are already visible in the data, and the Empire and Phil Fed production indicators are expected to give back some of their gains from the November election, going down in December,” Piper strategists note.
While the firm predicts 2% GDP growth by 2025, it warns that this will not be an “easy ride.”
“There are major volatility risks as Washington (hopefully) transitions to a more stable fiscal policy (slower emissions, less regulation, continued low taxes), and monetary policy (fewer rate cuts), which puts us in a position to see stronger growth. GDP growth, ” adds the article.
However, in the near term, Piper believes that the growing policy environment and financial uncertainty under Trump's leadership will contribute to the coming year.