How the Stock Market Could Shape Trump’s Economic Policies in a Second Term

Headlines

• Trump’s past term showed a close tie between policy moves and market reactions.
• Stock market performance may influence his policy decisions on tariffs and the Federal Reserve.
• Major tariffs on China and potential Fed changes could cause significant investor concerns.

Former President Donald Trump’s possible return to the White House in 2025 could come without many of the figures who previously challenged his more controversial policies. Key Republican critics in Congress have either changed stance or lost their seats, and former advisors like Gary Cohn, who resisted tariff increases, are unlikely to rejoin. The recent retirement of Special Counsel Jack Smith and the Supreme Court’s expansion of presidential immunity could also impact the environment Trump would navigate.

A force that could temper some of Trump’s more extreme economic policies, however, is the influence of the U.S. stock market, valued at approximately $50 trillion. In his first term, Trump frequently referenced market performance, treating the Dow Jones Industrial Average as an indicator of his administration’s success. He regularly shared even minor market achievements, a stark departure from the hands-off approach typically adopted by previous presidents.

Insiders have reported that Trump was particularly pleased with the stock market's positive response following his recent electoral win. While Trump’s policy decisions have previously stirred market reactions, his proposed actions in a new term could have similar or even greater impacts. For example, investors may respond sharply if he revisits conflicts with the Federal Reserve, including any moves involving current Fed Chair Jerome Powell, with whom Trump has had a tense relationship.

In his initial term, Trump’s trade policies with China, especially the tariff hikes, created considerable turbulence in financial markets. At one point, a trade conflict with China led to notable declines in December 2018. This market reaction pushed Trump to pursue a meeting with China’s President Xi Jinping, hoping to ease tensions. When the markets failed to stabilize afterward, Trump became increasingly concerned about how these losses might reflect on his political standing.

Trump’s recent vow to enforce significantly higher tariffs on China if re-elected could similarly affect the market. China remains one of the U.S.’s largest trading partners and a critical source of supplies for American businesses. Any new tariffs or substantial shifts in trade policy might prompt strong reactions from investors, especially if market stability is threatened. How Trump chooses to navigate these dynamics could play a substantial role in shaping his second term.