And so it begins. The new American president has begun to unleash exactly the barrage of threats and orders that he promised during the election campaign. The result will be heightened geopolitical and economic uncertainty – and financial volatility.

Trump obviously sees tariffs as some kind of Swiss army knife – a tool that can be used for multiple purposes: Stop illegal migration and smuggling of fentanyl, improve US trade, increase the use of USD, increase federal revenue etc etc. He is willing to use threats of tariffs as a weapon also against allies and friendly nations.

Furthermore, the threat can be used for negotiations and dealmaking in a way which makes forecasting just about impossible. The bigger picture is that the world as a whole is transitioning to a new world order, where protectionism, security and industrial policy will be more prominent – creating both political, economic and financial volatility. The only certainty in this world is uncertainty.

So, what is our take?

Many analysts hope that the bite will be less dangerous than the bark. So far, markets seem to be willing to give the new president the benefit of doubt, hoping that the threats will prove to be mere threats without long-term, economic consequences. The Trump trades may thus last for some time yet. And yes, there is indeed the possibility that things will calm down and US growth in the best of worlds even might strengthen, as deregulation and corporate tax cuts will elevate profits and investments. Developments during Tump’s first term indicate that this could be a plausible scenario.

However, during Trump 2.0 the president seems to be better prepared to implement his agenda. Also, the world is in a more vulnerable state now, after pandemic and wars, with higher interest rates, higher debts and a more fractured geopolitical picture.  Thus, a more likely scenario, In our view, is that uncertainty about the global future will hurt long-term decision making and investments. Supply chains will be broken and production costs will increase. Eventually, global economic growth will slow.

Furthermore, Elon Musk and DOGE will not be able to deliver the expenditure cuts hoped for. The budget deficit will remain large and government debt will continue to rise. Higher costs due to low productivity, labour shortages and tariffs will keep inflation on a level well above the Fed’s comfort zone. As a result, market rates in the US will not come down. As large portions of debt need to be rolled over at higher rates, the costs of the debt will increasingly crowd out other necessary expenditure.

High interest rates will keep the USD strong – while the currencies of several other countries will fall, as a consequence of tariffs and protectionism. The trade war may thus lead to a currency war as well.

This macroeconomic environment is in general detrimental to stocks. Market cap will rise much more slowly this year than previously envisaged; it might even fall. Volatility will be high, and we might see some steep setbacks. The same goes for crypto assets. The flip side is that stock market scares may prevent the American administration from some of it more hare-brained schemes. Possible, some of the big tax cuts will not become reality.

Even so, uncertainty and threats will be the dominant factors in financial markets. Some of the Magnificent 7 will also take a pounding as Chinese competitors rev up.  In this trying environment, we stick to our guns and the strategy we have outlined in recent months. In general terms, this means rotating out of American large-cap tech into small-cap in the US and Europe, as well as government bonds. Additionally, long-term investors may find value in exploring opportunities in start-ups, such as those in Dahlgren Capital’s portfolio of unlisted small Swedish AI leaders. In total, this gives both cash flow and protects the portfolio from some of the expected high market volatility.