Oraclum Capital founding partner and CIO Vuk Vuković, PhD, said the interplay between Donald Trump’s policies and the Fed’s reactions to the outcomes will shape finance in 2025.
Vuković said inflation will once again be at the forefront of market (re)action, as it could potentially be triggered by Trump’s tariffs on imports. If applied across the board, higher tariffs always translate into higher domestic prices of foreign goods, which hurts consumer spending and increases inflation pressures.
“The economy is already in a delicate balance, awaiting another inflation surge, which hasn’t really been priced in at all by the market,” Vuković said. “Therefore, another surge due to the economy overheating or due to poor policy decisions could provide a significant headwind for equities and could pose a problem for the administration in general, especially given their victory was built on anti-inflation sentiment and narratives.”
Vuković explained this is where the Fed comes in. Should inflation near 4%, he believes the Fed will be forced to pause or postpone rate cuts. Certainly, they will be more hawkish as it will disturb the “soft landing” narrative and bring us back into the “higher for longer” environment.
“This is what the bond market has been anticipating over the past few months, and it is clear now why bond yields are at 4.3% for the 2Y, even when rate cuts are being priced in at 3.5% for 2025,” Vuković said. “The bond market is challenging the Fed again, just like it did back in 2022.”
“Therefore, the interaction between Trump’s policy decisions and the Fed’s response function, plus any public outbursts of the administration against the Fed and its independence, is where I see the biggest risks.”
This is where he sees the Trump administration potentially having the biggest impact. His nominees share the theme of cutting wasteful government spending. That makes Vuković bearish on all companies that have big contracts with the government or have large shares of revenues coming from government tenders.
“On the other hand, a handful of companies directly linked to Trump’s nominees and close associates should benefit greatly,” Vuković said. “Banks should outperform, as will most of the tech sector, given that it will remain the driver of the heavily concentrated market returns.”
“We already saw the post-election impact on TSLA. But be wary; this could prove to be a double-edged sword if tensions arise between Musk and Trump after the honeymoon phase passes. Judging by their egos, the honeymoon probably won’t last that long.”