The direction of U.S. stocks, the U.S. dollar, and gold under three scenarios of "Trump 2.0"

Four years later, Trump makes a strong return to the American political arena. Looking ahead, how will the Trump 2.0 policy affect global capital markets?

On November 22, Bank of America global economist Claudio Irigoyen released the latest research report, stating that Trump's economic policies mainly involve trade, immigration, fiscal policy, and deregulation. Due to the relative scale and sequence of the policies being unclear, the impact on economic growth, inflation, and monetary policy remains uncertain.

Accordingly, the report hypothesizes three scenarios that Trump 2.0 may trigger in the coming years.

Scenario 1 (The Good): Deregulation and balanced fiscal policy, slightly stronger dollar, lower gold prices

In the best-case scenario, Trump 2.0 will focus on a growth agenda, including: deregulation, actively reducing taxes while cutting fiscal spending to ensure budget balance, and downplaying tariffs and immigration restrictions that are detrimental to economic growth.

From an industry perspective, the report indicates that easing regulations on the banking sector would help alleviate credit constraints and promote stability across the financial system (especially for private lending). Easing regulations in the energy sector could put downward pressure on energy prices, particularly oil prices, helping to reduce the trade deficit.

In terms of trade, Trump's 2.0 tariff and immigration restriction policies may be relatively moderate, benefiting emerging economies and potentially driving global economic growth above 3.7%.

The report states that in this scenario, global real interest rates and inflation expectations will rise, the dollar will be slightly stronger, and gold prices will be relatively low. It is expected that the U.S. economic growth rate will exceed 3%, and the Federal Reserve may continue to "stay put" or even raise interest rates.

The report also adds that the dollar's fluctuations may not show a clear trend, as it is influenced not only by U.S. policies; the trajectory of inflation mainly depends on how expansionary fiscal policies are implemented.

Scenario 2 (The Bad): Significant tariff increases, heightened recession risks, global shift to risk aversion

In a worse-case scenario, Trump 2.0's deregulation agenda stalls, fiscal easing is minimal, and only a small amount of tax cuts will be implemented. Due to concerns about government debt, the market may begin to price in higher interest rates.

The report states that in terms of trade policy, the U.S. government will pursue aggressive tariff policies, significantly raising tariff rates and tightening immigration policies, accelerating the outflow of immigrant labor.

Bank of America believes that aggressive tariff policies will hit global trade, increasing uncertainty, leading to a collapse in global investment, a decline in consumer confidence, a sharp drop in stock prices, and ultimately a decline in consumption, pushing the U.S. economy into a recession.

The report indicates that in this scenario, although rising tariffs will temporarily push up inflation, the Federal Reserve will still significantly cut interest rates due to concerns about economic growth, resulting in low real interest rates across various industries after excluding inflation.

Bank of America expects that in this global risk-averse scenario, long-term inflation expectations will also decline; the dollar's trajectory remains uncertain, potentially weakening as the Federal Reserve eases monetary policy, also influenced by subsequent fiscal and monetary policies of other countries

Scenario 3 (The Ugly): The U.S. Falls into Stagflation, the Dollar Weakens Across the Board, Benefiting Gold and Cryptocurrencies

In a scenario where tail risks accumulate, almost all conditions enter a "worst-case" state, with extreme escalation of geopolitical tensions, and the U.S. economy will fall into stagflation.

Moreover, considering that the U.S. government may not be able to finance its deficit at reasonable interest rates, the Federal Reserve may be forced to implement yield curve control, which amounts to the monetization of the fiscal deficit, severely damaging the Fed's reputation.

The report adds that in this scenario, due to extremely tight financial conditions, real interest rates remain very low, but long-term inflation and its expectations will rise significantly, leading to a comprehensive weakening of the dollar's status as a reserve currency, with gold and cryptocurrencies becoming the main beneficiaries.

For the global economy, this is also an extremely unfavorable scenario that could lead to a global economic recession and further complicate geopolitical issues