‘A risk-on unleashing of animal spirits’: How Wall Street fell for Trump

Scooping up potted shrimp with a slice of toast in a St James’s club on Wednesday lunchtime, an American private equity executive reflected on Donald Trump’s popularity with a certain breed of Wall Streeter. The 45th president — soon to be the 47th — was “odious” as a property developer, he said, “and he hasn’t changed for anything”. But many of New York’s financial power brokers thought it possible to separate an appealing “message” — deregulation and tax cuts being their favourite elements — from a vulgar messenger. The executive said a well-known hedge fund tycoon had told him: “Hold your nose and vote for Trump.”
Trump’s decisive victory over Kamala Harris powered US stocks towards their best week in a year. The S&P 500 blue-chip index hit 6,000 for the first time. The result also sent the dollar and US Treasury yields spiking, as markets priced in the risk of higher inflation and interest rates. A senior hedge fund executive described it as “a risk-on unleashing of animal spirits”.
Shares in investment banks that are particularly focused on deal-making, such as Goldman Sachs and Morgan Stanley, registered double-digit gains. Trump has said he will fire Gary Gensler, chairman of the US Securities and Exchange Commission, in favour of a more bitcoin-friendly regulator. Many on Wall Street hope he will give similar treatment to Lina Khan, the hawkish chairwoman of the Federal Trade Commission (FTC), the competition watchdog. The 35-year-old, described by Republican congressman James Comer last month as a member of the “radical left”, has tried to block a long line of deals, including a proposed merger between the owners of luxury brands Coach and Michael Kors.
The Joe Biden era has been a barren one for the consummation of mergers and acquisitions. So far this year about 60 per cent of competition investigations have ended with the deal being abandoned, according to law firm Dechert. On Wednesday, David Kostin chief US equity strategist atGoldman Sachs, predicted that “the regulatory posture” of the FTC and the Department of Justice’s antitrust division would be “more relaxed under the incoming administration”. Goldman forecasts a 20 per cent rebound in deal-making next year — which would shower billions of dollars more in fees on Wall Street.
New York City remains staunchly Democratic, albeit less staunchly than in the past. In 2016, Hillary Clinton beat Trump there by almost 63 percentage points. In 2020, Biden’s margin was 54 points. Last week, under Harris, the Democrats’ lead was cut to 37 points. Trump did particularly well among non-white voters in “outer boroughs’’ such as the Bronx, Brooklyn and Queens.
Manhattan’s most senior figures tend to be pragmatists. JP Morgan’s executive chairman, Jamie Dimon, in effect Wall Street’s leading man, privately supported Harris, according to a New York Times report last month. But at Davos in January, Dimon said he wished Democrats “would think a little more carefully when they talk about Maga” — Trump’s “Make America great again” movement. The once and future president was “kind of right about Nato, kind of right on immigration”, Dimon said. “He grew the economy quite well. Trade tax reform worked. He was right about some of China.”
Many of those who voted Republican also did so pragmatically. Ken Griffin, the billionaire founder of the Citadel hedge fund, whose headquarters he moved to Miami two years ago, donated $100 million (£77 million) to pro-Republican political action committees in this election cycle, but appeared ambivalent about Trump. Last month, he said “neither candidate’s going to receive an award for the quality of their leadership”. The furthest he would go publicly was to tell a panel at Saudi Arabia’s annual investment summit that “the expectation today is that Donald Trump will win the White House”.
Then there are true Trump believers. Howard Lutnick, billionaire chief executive of the brokerage giant Cantor Fitzgerald, is joint leader of Trump’s transition team, and tipped as possible Treasury secretary. Other candidates for the role include Scott Bessent, a hedge fund manager and founder of Key Square Capital Management, and John Paulson, another hedge fund manager. The founder of Paulson & Co rose to prominence betting against sub-prime mortgages before the 2008 financial crisis.
Barry Gosin is chief executive of Newmark Group, Cantor Fitzgerald’s property brokerage business, which Lutnick chairs. “The Democratic Party just missed the point in the US,” Gosin told The Sunday Times. “Trump tapped into something the Democrats just missed: the working-man’s grievance across the country that is not necessarily a racial or cultural identity crisis, but a class crisis. People are looking to bridge the gap and looking to Trump to solve the problem.”
Gosin said that by reaching blue-collar workers as well as millionaires and billionaires, Trump was “able to weave together a coalition of different kinds of people that has probably never been seen”.“The Democrats had every good intention to solve specific problems with solutions that were a potpourri list of items,” he said. “But the bigger issue is that people that voted for Trump felt he was listening to them. He got to the issues of some of the aggrieved, working-class people in America. Couple that with policy that actually serves wealthy business people … Turns out the knuckleheads who thought that he didn’t get it — maybe they didn’t get it.”
Deregulation is the top priority for Republican voters on Wall Street, although Trump’s record in the field is mixed. He left office in 2021 claiming in his first term to have “slashed more job-killing regulations than any administration has ever done before”. However, the Institute for Policy Integrity, a non-partisan think tank at the New York University School of Law, estimated that just 22 per cent of the first Trump administration’s regulatory or deregulatory actions survived legal challenges unscathed. An article published by the Cato Institute, a libertarian think tank, said Trump simply added new regulations at a slower pace than Barack Obama. It found that the page count of the Code of Federal Regulations had grown by 0.8 per cent, as had the number of regulations. “The net effect … of the Trump administration has not been deregulation but, at best, a plateau in the upward historical trend,” wrote Pierre Lemieux, an economist at the University of Québec.
And at least one piece of deregulation under Trump potentially contributed to a crisis. In 2018, his administration softened the Dodd-Frank Act passed under Obama, which required banks with at least $50 billion in assets to undergo an annual stress test and maintain certain levels of capital and liquidity. Under Trump, the threshold was raised to $250 billion. Silicon Valley Bank, which escaped stricter supervision thanks to that move, collapsed last year after a digital run on its deposit base. Biden criticised “the last administration” for “roll[ing] back some … requirements” as he announced that the federal government would guarantee deposits.
Trump is also promising to revive and extend a $4 trillion package of tax cuts signed into law in 2017, and to implement some new ones — such as exempting waiters’ tips from tax. The non-partisan Committee for a Responsible Federal Budget, a a non-profit public policy body, estimates that Trump’s fiscal easing would add $7.8 trillion to the US debt by 2035, bringing the deficit of 6 per cent of GDP — already the biggest among OECD countries — to as high as 12.2 per cent. (The committee said that Harris’s plans would have added almost $4 trillion to the debt and taken the deficit as high as 9.5 per cent.)
Trump has called tariff “the most beautiful word in the dictionary”. He talks admiringly of William McKinley, US president at the turn of the 19th century, who raised so much revenue through tariffs that he was able to avoid imposing a federal income tax. Lutnick told a podcast last month: “Don’t tax our people. Make money instead. Put tariffs on China and make $400 billion.”
Trump is proposing the widest-ranging tariff regime in almost a century. He has said he will apply a 20 per cent across-the-board levy on the $3 trillion-plus of goods the US imports annually, with charges of 60 per cent for Chinese products. Trump has said tariffs are “phenomenal” economically and “good for negotiation”. But the Peterson Institute for International Economics estimates that his present plans would increase costs for a typical American household by $2,600 a year, and studies have shown tariffs can hurt some domestic sectors while helping others — for example, protecting steel and aluminium producers but raising costs for factories that turn those materials into products.
The last time Washington brought in such sweeping tariffs — with the Smoot-Hawley Tariff Act of 1930 — international trade collapsed by two-thirds. Smoot-Hawley is widely seen as having exacerbated the Great Depression, although Trump has dismissed comparisons and said the legislation did not take effect until after the Depression had started.
On unpalatable issues such as tariffs, the Wall Street case for Trump tends to involve the formulation that he should be taken seriously but not literally. Bessent said last month that the numbers thrown out by Trump were “maximalist” positions. “My general view is that at the end of the day, he’s a free trader,” Bessent said. “It’s escalate to de-escalate.”
However, the same hedge fund executive who described the post-election mood as “risk-on” pointed out that, given higher inflation and interest rates, markets were more jittery than during Trump’s first term. The bond-market rout that blew up Liz Truss’s mini-budget in 2022 was visceral proof that investors would not tolerate unfunded borrowing and spending by already highly indebted governments. The post-election sell-off in US treasuries, which calmed as the week went on, indicated nervousness about a possible inflationary surge under Trump, caused by both tariffs and debt-fuelled tax cuts. That scenario would see the sugar rush Wall Street is anticipating followed by an economic crash.
“In the previous decade, when stimulus — both monetary and fiscal — was so overly accommodative, markets could take in a lot of nonsense,” the executive said. “I’m not saying that Trump is nonsense, but if he were to introduce nonsense, this is a more fragile period.”
Despite his hedge fund friend’s advice, the American private equity executive who enjoyed lunch in St James’s on the day of the results found it impossible to hold his nose and vote for Trump. “I remember voting for Ronald Reagan, and Reagan saying, ‘I didn’t leave the Democratic Party — the Democratic Party left me’,” he said. “I’m beginning to feel that way about the Republican Party. There’s a lot there I don’t like. Some of it is character flaws in Trump, but some of it is just basic things. I like to balance the budget, right? Or at least try to balance the budget.”