OPINION:
President Trump is reshaping the American economy around populist themes — less government, protectionism and limits on immigration — and these should be weighed in managing your long-term investments.
International trade policy
The World Trade Organization was founded on the most favored nation principle that each country charge imports from other members the same tariffs or zero tariffs as parties to a free trade agreement. Those tariffs were capped through successive rounds of negotiations.
Mr. Trump is effectively abrogating those agreements with reciprocal tariffs enumerated by country and specific tariffs for industries such as automobiles.
Those will boost inflation, slow growth and instigate more volatility for stocks. This is no time to panic but rather to access the policy landscape and the longer-term prospects for the U.S. and global economy.
Monetary and fiscal policy
The Federal Reserve is taking a cautious approach toward inflation and employment, and for now is likely to hold interest rates steady.
Labor markets are weakening. White-collar workers displaced by corporate downsizing and artificial intelligence face increasing difficulties finding jobs.
Inflation for services, which accounts for 61% of the Consumer Price Index, remains stubborn at about 3.7%. Goods inflation, excluding food and energy, was negative through July but has been generally positive since then.
The reconciliation package moving through Congress indicates that tax cuts and increased defense and border enforcement spending will add significantly to the budget deficit, keeping it close to 7% of gross domestic product for 2026 to 2028.
All that assumes congressional Republicans follow through on cuts to Medicaid, food stamps and general government to help finance tax cuts and increased spending on defense and border enforcement.
Either the Fed prints money to absorb the additional debt or bond markets will further push up interest rates.
Longer term, investors should plan for a combination of elevated inflation and interest rates.
Border enforcement, deportations and not enough workers
The U.S. economy suffers from industry-specific labor shortages, even with 7.2 million unemployed, because either job seekers don’t want to do the work that needs doing — picking lettuce, butchering in meatpacking plants or laboring in construction — or they lack skills for openings in industries such as shipyards and data centers.
The first-term Trump and Biden economies accomplished 2.5% annual growth by boosting the federal deficit from 3.1% in 2016 to 6.4% in 2024 and by first mopping up lots of unemployed Americans and then adding immigrant workers with President Biden’s open borders.
Legal and illegal immigrants added 5 million workers from 2020 to 2024.
It’s doubtful Mr. Trump will be able to deport many more than 3 million illegal immigrants. If the Democrats win back the House through special elections for vacated Republican seats or in the 2026 midterms, the pace may be slower owing to pushback on needed funding for his efforts.
As the bad news rolls in about inflation, voters will sour on Mr. Trump, and that will limit support for tariffs and tougher enforcement on peaceable, working illegal immigrants.
In aggregate, we should still have enough workers. The lettuce in California will get picked.
Investing with higher inflation
With inflation expectations rising, investors may have to live with inflation in the 3% to 4% range, but as long as real growth is robust, that should not pose a barrier to good returns on stocks.
The 40 years prior to the global financial crisis, GDP growth and inflation averaged 3% and 4%, the 10-year Treasury yield was 7.4%, appreciation on existing homes was 5.6% and the S&P 500 return averaged 10.5%.
With the Magnificent 7 — Apple, Amazon, Google, Microsoft, Nvidia, Meta and Tesla — having dramatically outperformed the total market in 2023 and 2024, it’s not great portfolio management to bet on them alone as equities recover.
Thematic funds, such as one to ride the artificial intelligence craze, don’t have a great track record. Hence, it is still prudent to invest in a broad index such as the S&P 500.
The Trump tariffs have been compared to Brexit, which dealt a significant blow to British growth, but it was also quickly followed by COVID-19, blurring a sorting of its overall effects.
The United States has a much larger, more diversified and globally dominant economy. It can better absorb such a disruption in supply chains. Witness its recovery from COVID-19 compared with other major economies.
Still, with prospects improving in Europe owing to increased defense spending, it’s prudent to internationally diversify, for example, with a broad non-U.S. index fund such as the Vanguard Total International Index Fund.
Depending on your age, one-fifth to half of your nest egg should be in fixed income assets — high-yield money market accounts such as those offered by Vanguard, Treasurys and other high-quality bonds — with staggered maturities ranging to 10 or 20 years, depending on when you will need cash for college expenses, retirement, etc.
• Peter Morici is an economist, an emeritus business professor at the University of Maryland and a national columnist.
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