As the holiday season in the USA approaches, it also means that the market is getting closer to the day when Trump returns to the White House. Although over a month has passed since Trump won the election, the market has already priced in this event. However, like Trump's first term, chaos is likely to remain a characteristic of Trump 2.0.

For example, when delving into the potential cabinet picks and political appointments that could affect Trump's economic agenda, it is found that some individuals express viewpoints that seem inconsistent with the policies proposed by the elected president or statements from other nominees. In this case, investors should reconsider whether the market pricing is still reasonable.

Here are some key policies that can define Trump 2.0 investments.

First and foremost is the confrontation between supporting economic growth and cutting spending.

Trump's nominee for Secretary of the Treasury, Scott Basant, clearly belongs to the first camp. He summarized his economic plan as a version of the late Japanese Prime Minister Shinzo Abe's 'three arrows' strategy. Basant's 'three arrows' strategy includes 3% real GDP growth, a 3% federal budget deficit, and an additional production of 3 million barrels of oil per day.

While the GDP target may be achievable, reducing the deficit to 3% of GDP seems unlikely, as the current deficit is approaching 7% of GDP. Many, including the CEO of Exxon Mobil, believe that the energy production targets are unlikely to be met.

Basant's focus on growth also seems inconsistent with Elon Musk's enthusiasm for cutting costs. Musk was one of Trump's main financial backers in the recent election and is set to be the co-head of the newly established Department of Government Efficiency (DOGE).

One viewpoint suggests that considering the thinness of the DOGE appointment and Trump's long-standing support for growth, which has never shown enthusiasm for reducing deficits, the scales would tip in favor of Basant. Therefore, Trump may ultimately sideline Musk and turn toward policies that support growth, which would be welcomed by business figures who may rejoin him after his second term ends.

However, the past decade has shown that it is best not to underestimate Musk.

In addition to the debate on growth, Trump has also threatened to impose hefty tariffs on many of America's major trading partners, including China, Mexico, Canada, and Europe. Tariffs are central to Trump's campaign and are an area where the president can exert significant authority.

Financial markets will closely monitor the internal struggles between the president and core advisers supporting the tariffs (including Commerce Secretary nominee Howard Lutnick) and the more traditional economic camp (including Bensent and incoming White House National Economic Council director Kevin Hassett). The side supporting the tariffs may initially have the upper hand, but economic realities might change that.

What does market pricing reflect?

As these debates intensify, investors should prepare for unexpected rapid shifts in policy. Trump recently threatened on social media to impose high tariffs on Mexico and Canada, with an additional 10% tariff on China, which may be a preview of what is to come.

But investors will recall an old market adage: what matters is not the news, but the reaction to the news. In this case, the market's immediate reaction was relatively mild, with most asset prices returning to pre-event levels within about a week, and in some cases even higher, including Chinese stocks and the Mexican peso.

This indicates that investors who have previously seen the Trump tariff playbook have either digested the possibility of imposing new tariffs or have not taken the numerous threats seriously.

Looking ahead to 2025, investors seeking the best risk/reward opportunities should consider which potential policy scenarios are priced in and which are not. It can be said that the pricing of the US stock market is perfect, with relative valuation premiums reaching record levels compared to much of the rest of the world.

Although the risks of increased tariffs seem to have already been reflected in the prices of many non-USA companies, potential positive policy responses to Trump's threats do not seem to be priced in yet, such as Germany possibly relaxing its "debt brake" and China's direct support for Consumers—after the announcement of China's "moderately loose MMF policy," several China-related Stocks ETFs saw daily gains close to 10% on Monday.

Editor/ping