Stocks popped after Donald Trump won the presidency in 2016. Markets had priced in a Hillary Clinton win, and Trump’s surprise victory raised the odds of business tax cuts and higher corporate earnings. That came to pass, validating investors who bought stocks when Trump won.

A second Trump presidency could be less welcome, based on evolving estimates of how Trump’s policies would impact markets and the economy if he wins a second term. “Most of the major policy initiatives being suggested by Donald Trump’s campaign would be inflationary,” Paul Ashworth, chief North American economist at Capital Economics, wrote in an April 29 analysis. Ashworth cited several Trump proposals that could upset markets: More tariffs on imports, devaluing the dollar, curbing immigration, and possibly meddling with Federal Reserve policy.

Trump’s economic agenda for a second term is part playbook and part improvisation. Trump has clearly stated his desire to raise tariffs beyond the levels he established during his first presidential term and roll back immigration as aggressively as possible. Possible plans to devalue the dollar and assert more control over the Fed come from media reporting with Trump aides and other tipsters who might be floating trial balloons to gauge public reaction.

Markets survived Trump's trade wars during his first term, despite predictions that Trump’s tariffs would hammer the economy. As president, however, Trump imposed tariffs that were much lighter than what he proposed as a candidate. His pitch as a candidate in 2016, for instance, was to slap a new 45% tariff on all Chinese imports. As president, however, Trump imposed tariffs ranging from 7.5% to 25%, and they only applied to about half of all Chinese imports.

Even then, stocks gyrated for much of the time Trump was threatening and imposing new tariffs, while China responded with its own punitive trade measure on imports from the United States. And the original Trump tariffs did hurt the US economy. One analysis found that American firms and consumers paid an extra $48 billion per year in Trump tariffs. That would have been higher except some Chinese importers rerouted their shipments through other countries, such as Vietnam and Mexico, to avoid the tariffs. There’s no evidence the Trump tariffs boosted US manufacturing, as he intended.

Trump was lucky to have pushed through his tariffs during an otherwise benign time for the global economy. The COVID pandemic that erupted in 2020 changed the whole picture, as Trump himself should know, given that COVID caused a recession along with massive dislocations that probably contributed to Trump’s loss to Joe Biden in that presidential election.

Some voters blame Joe Biden for the inflation that arrived from nowhere in 2021, but it mostly came from COVID-related supply chain snafus, dramatic shifts in buying patterns, and tight labor markets that pushed labor costs up. Those pressures have eased, but the post-COVID economy is more prone to inflation no matter who’s in charge.

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That could make a new set of Trump tariffs more damaging than the first one. Oxford Economics recently modeled two scenarios, one in which tariffs rose sharply in a second Trump presidency and another in which they rose modestly. Those correspond with the full set of Trump’s proposed tariffs and another outcome in which real-world pressures might limit the new tariffs Trump might impose.

In the “full” Trump scenario, new tariffs broadly disrupt global trade and cause economic decline in the United States and most of its main trading partners. Since tariffs push costs up, inflation gets worse, and the Federal Reserve has to push interest rates higher than it otherwise would to mitigate against inflation.

The Oxford model doesn’t include the effect on stocks, but rising interest rates in a recessionary environment would normally put heavy downward pressure on stocks. Higher US interest rates would make the dollar stronger, not weaker, and therefore make US exports more expensive overseas, probably causing a decline in exports too.

In the “limited” Trump scenario, the eventual effect of a lighter set of tariffs is also negative, just not as much. Neither scenario brings a net gain to the US economy.

In addition to tariffs, the other big issue for investors in this year's election is what happens when the 2017 tax cuts for individuals expire at the end of 2025. Trump would insist on extending all of those tax cuts or making them permanent. He would also press for an even lower corporate tax rate, hoping to cut it from 21% to 15%.

The corporate tax rate is set at 21%, so that won't change at the end of 2025 unless Congress passes another law setting it higher or lower. That’s unlikely, unless Trump or Biden wins with his party in full control of Congress.

If Biden wins a second term, however, he’ll push for letting all the individual tax rates go back to their prior, higher levels, except for families earning less than $400,000 per year. That could happen with a split Congress, based on how the two parties negotiate.

Trump’s agenda includes a few other peculiarities that could roil markets. Trump dislikes Fed Chair Jerome Powell — even though he appointed him in 2018 — and might try to replace Powell with some kind of loyalist before Powell’s term expires in 2026. The Senate would have to approve a replacement, which could limit how much of a sycophant Trump could install. But any kind of political fiddling with the Fed’s independence could undermine confidence in the world’s most important financial institution.

A weak-dollar policy, in theory, would make US exports cheaper abroad and, therefore, boost US production. Trump’s former trade boss, Robert Lighthizer, argues for a weaker dollar and could play a key role in a second Trump term. But a weak dollar would also make imports more expensive, adding to inflation, at a time when baseline inflation is already elevated.

If inflation worsened and the Fed stuck to its normal playbook, it would raise rates, which would ordinarily make the dollar stronger, not weaker. So a Trump Fed might have to participate in any dollar-weakening scheme, subordinating its core mission of controlling inflation to whatever Trump wanted.

Manipulating markets for political purposes would probably backfire. “Any attempt to trample on the Fed’s independence would presumably trigger an adverse reaction in markets,” Ashworth of Capital Economics explained.

Trump’s plan to slash immigration and deport undocumented workers could cause similar economic blowback. While the nation’s antiquated immigration system clearly needs an overhaul, new research finds that record numbers of migrants have been boosting employment and economic growth and possibly keeping inflation lower than it would otherwise be.

Trump’s vow to corral immigration might sound like he’d bring order to a chaotic situation. Yet there would be an economic cost Trump doesn’t acknowledge. The US needs more immigrants, not fewer, to offset a declining birth rate and an aging population and help pay for the retiree benefits of the next several decades. If Trump sharply limited immigration and ramped up deportations, a tight labor market could get even tighter, and workers could be even harder to find.

Biden, for his part, is hardly a stock market cheerleader. But stocks have hit new highs during his terms, and another four years could look very much the same. Biden was hardly able to raise taxes when his fellow Democrats controlled both houses of Congress, so the odds of higher business taxes under Biden are pretty low. Biden has also been studiously deferential to the Federal Reserve’s aggressive monetary tightening, even though any president would love the tailwind of interest rate cuts during a reelection campaign. If Biden wins in November, there will simply be fewer surprises during the next four years than if Trump gets to conduct more experiments with trade wars and Fed wrangling.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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