NEW YORK, Jan 15 (Reuters) - Donald Trump's inauguration on Monday could usher in a more unpredictable time for markets, as the Republican is expected to swiftly address a range of issues such as trade and immigration that could impact asset prices.
Trump's proposed tariffs might heighten concerns about inflation, affecting bonds, while moves to tighten immigration controls could also reverberate across these markets. Efforts to ease regulations are poised to boost assets, including bank stocks.
"Markets will be very sensitive to this speech," noted Jeff Muhlenkamp, a portfolio manager at Muhlenkamp & Co. "Everyone is currently scrutinizing every word and nuance coming from Trump or his key allies."
Certain prices already reflect expectations like tax cuts, deregulation, and tariffs on imports. These steps could set the stage for future White House actions.
"Financial markets are ready to react to any sign that the new administration may pivot from its previous stance," remarked Doug Peta, chief U.S. strategist at BCA Research.
Historically, stock reactions to presidential inaugurations have been muted, but this time, with Trump's reputation for unpredictability and market-shifting statements, investors believe things could be different.
The S&P 500 has averaged a 0.27% decline following World War II inaugurations, moving up or down around half the time on inauguration day or the first trading day after if markets were closed, according to LSEG data.
After Trump's 2017 inaugural address, the S&P 500 concluded the day up by 0.3%. With markets closed on Monday due to the Martin Luther King holiday, the full market response might not be apparent until Tuesday.
In Trump's first term, the S&P 500 surged nearly 68%, despite bouts of volatility triggered in part by the U.S.-China trade war.
Investors have been adjusting portfolios for months in anticipation of the White House transition, as various "Trump trades" gained momentum even ahead of the November election.
For instance, Tesla shares, helmed by Trump supporter Elon Musk, soared 60% post-election. Meanwhile, bitcoin rose over 30% on hopes for a lighter regulatory climate, and private prison firms Geo Group and CoreCivic surged around 100% and 60%, respectively, in anticipation of increased demand amid potential immigration enforcement.
"The markets are beginning to factor in policy before it's fully formulated," noted Tony Roth, chief investment officer at Wilmington Trust.
While some "Trump trades" have waned, such as small-cap and regional bank stocks poised to benefit from deregulation, broader market optimism from Trump's pro-growth agenda post-election has tapered off.
The S&P 500, after initial gains, now hovers around 1% higher since November 5. Persistent inflation suggests markets anticipate the Federal Reserve ending its rate-cutting cycle sooner than expected.
Investors remain cautious of specific issues that could disrupt the momentum.
David Bianco, Americas chief investment officer at DWS Group, will be monitoring the inauguration speech for any hints regarding tariffs, noting Trump's swift action potential, which could dampen investor sentiment.
Jay Woods, chief global strategist at Freedom Capital Markets, is keeping an eye on business leaders attending the inauguration events to gauge corporate interests aligning with the White House.
Alex Morris, president and chief investment officer of F/m Investments, is listening for Trump's tone, especially if it leans towards anger over policy or generalities, which could affect bond and equity markets.