Many expected Donald Trump’s return to the U.S. presidency, but it carries significant implications. Experts are now speculating on how his leadership could reshape the crypto and financial markets. The current Biden administration has largely maintained a neutral or anti-crypto stance, whereas Trump openly expressed his support for digital currencies in 2024. As his presidency approaches, a wave of complex and far-reaching impacts on these markets is anticipated.
The Impacts of New US Political Leadership on Various Financial Markets
Stocks, bonds, and the US dollar are among America’s most followed financial markets. Below, we unpack how Trump’s presidency could affect these.
Effects on Stocks
The current change of political administration affects roleplayers in the stock markets in positive and negative ways.
On the positive side, potential tax cuts and higher spending on infrastructure benefit sectors like construction and energy. Meanwhile, increases in taxes (specifically corporate taxes) and tighter regulations wouldn’t favor high-growth sectors like finance and technology.
Generally, a political transition is followed by market volatility as investors navigate the unpredictability of these dynamics. In the months after an election, many traders sit on the sidelines, watching the drama unfold.
The Federal Reserve, or Fed, often takes center stage during presidential transitions, and Trump’s presidency is no exception. Analysts will closely monitor potential shifts in monetary policy under his leadership. Given their typically inverse relationship, the central bank’s approach to interest rates plays a crucial role in shaping stock market performance. Higher interest rates often lead to declining stock prices, while lower rates tend to drive them upward.
Effects on Bonds
Bonds often react to the government’s fiscal policies and the Fed. An administration that prefers a hawkish central bank (i.e., rate hiking) generally results in higher yields on new bonds. On the other hand, a dovish central bank (i.e., rate-cutting) usually aligns with lower yields on new bonds.
Bond investors would also question how the upcoming Trump administration will handle the national debt. Despite the negatives of deficits, these raise bond yields as the government needs buyers to cover the debt. Furthermore, investors desire higher returns to compensate for the risk (one being inflation) that comes with the debt. An administration that relies less on debt fosters lower bond yields (as fewer bonds are issued) and lessens the impact of risks like inflation.
Effects on The US Dollar
Donald Trump’s first term saw him adopt a protectionist approach, focusing on ‘America First’ principles. His administration will likely follow the same path with an emphasis on imposing tariffs on tariffs, domestic agreements, and strict trade agreements.
These changes would weaken the US dollar, affecting bond and stock markets in various ways. Meanwhile, if Trump adopts a less protectionist approach, this could strengthen the greenback.
The upcoming political transition will also affect how foreigners perceive America. Confidence among international investors would be positive for the dollar as it fosters demand for US-based assets. On the contrary, less global confidence would be dollar-negative, fostering less appeal for US-based assets.
The Impacts of New US Political Leadership on Crypto
Regulation is one of the long-running themes for the relatively new crypto market. The regulatory picture in the States is strict and evolving. However, history tells us that the Trump administration would likely have a lax, hands-off approach.
Pro-crypto policies are catalysts for a bullish crypto market. However, they also encourage large financial institutions (who may have been anti-crypto before) to enter the space. Even in 2024, players like BlackRock, Charles Schwab, and Fidelity issued exchange-traded funds (ETFs).
The political transition in the US is expected to continue this trend, with institutions navigating a crypto trading platform like an exchange to hedge against risks and capitalize on trading opportunities.
Another conversation for the new Congress to consider is central bank digital currencies (CBDCs). While Trump is anti-crypto, he has opposed the former when the Fed actively researches the idea. Although CBDCs reinforce the crypto market, this would give competition towards the US dollar and make it less relevant.
There needs to be more indication of future financial stability in the States. In the worst-case scenario, the crypto market would be boosted as people seek alternative assets. On the other hand, more stability favors more strength in traditional investments like the dollar, bonds, and stocks.
Navigating The US Financial Markets
Transition periods in political leadership always bring uncertainty and volatility across financial markets. For traditional assets, monetary policies from the Fed, the level of national debt, inflation, and trade agreements are among the influential factors. For crypto, regulation, developments around CBDCs, and US financial stability will determine its level of presence. Investors will closely monitor traditional and alternative financial markets as the new leadership shapes the future of the US economy.
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