Washington, D.C., is in an uproar as President Trump's henchman Elon Musk rampages through the federal bureaucracy, firing thousands as he attempts to slim the government.
Financial markets, however, seem unperturbed by Musk's so-called Department of Government Efficiency (DOGE). "Most of what Musk is working on is small in terms of total fiscal impact," economist Robert Embree of Rosenberg Research wrote in a Feb. 21 analysis. "The fiscal effects are small so far, and [investors] are waiting for Congressional action on the budget."
A month into Trump's tumultuous presidency, the army of analysts trying to make sense of Trump's orders, threats, and inclinations has established a sort of taxonomy guiding investors through the chaos. Three worrisome developments are Musk and his DOGE marauders, deportations, and tariffs. Positive offsets should come later this year through deregulation and tax cuts.
The stock market has basically been flat since Trump took office, while long-term interest rates have dipped slightly. Markets aren't cheering Trump, but they're not panicking either. Investors don't like the uncertainty Trump has introduced, but for now they seem to be betting things will work out. Here's some handicapping on the downsides and upsides.
Any company operating this shabbily would watch its stock price plummet. But analysts aren't especially worried about Musk's government cuts harming the broader economy. About 3 million Americans work for the government, which sounds like a lot, but it's less than 2% of the total US workforce. Musk could plausibly cut about 200,000 federal jobs, which could show up as a couple of disappointing jobs reports this year. But that would still represent just one-tenth of 1% of all jobs. And Musk can't cancel federal spending. That's Congress' responsibility, and even a Republican-controlled Congress ends up struggling to pass big spending cuts.
Deportation
Purging the nation of undocumented migrants is one of Trump's top campaign promises, and if he makes good on his word, it could hammer industries such as agriculture and construction, where migrants are a crucial source of labor. But Trump's early efforts are mostly targeted raids aimed at migrants with criminal records, and he has already declared the southwest border "closed," a way of declaring victory. Net migration will almost certainly decline in future years, which would slow economic growth, but at the moment that doesn't portend any kind of crisis.
President Donald Trump gestures to the crowd at the Conservative Political Action Conference at the Gaylord National Resort & Convention Center on Feb. 22 in Oxon Hill, Md. (AP Photo/Jose Luis Magana) ·ASSOCIATED PRESS
Tariffs
These represent Trump's biggest risk to markets. If Trump imposed all the tariffs he has threatened, the average tax on $4.1 trillion worth of imports would rise from 2.5% to 7%, according to the Tax Foundation. That would represent a tax hike of about $106 billion on US businesses and consumers, enough to lower GDP growth, employment, and household income.
The economy would survive tariffs of that magnitude without a recession, but some sectors would reel. S&P Global Ratings, for instance, said the full tranche of Trump tariffs could hit the auto industry with "a multibillion dollar impact on profitability metrics." Costs would rise throughout the supply chain, with automakers passing most of their own higher costs on to consumers.
Long-term interest rates would also likely rise since tariffs raise prices, and higher expected inflation raises the premium investors demand for loaning their money. This could actually prevent Trump from imposing all the tariffs he has threatened. Trump and Treasury Secretary Scott Bessent have indicated they're closely watching the interest rate on 10-year Treasury bonds, which were at 4.6% when Trump took office and have since slid to about 4.4%. If markets think new Trump tariffs will likely worsen inflation, the 10-year could drift toward 5%. If Trump is mostly bluffing about tariffs and inflation flattens out, the 10-year could drop toward 4%.
Trump's tariffs so far include a new 10% duty on most Chinese imports and a 25% tariff on steel and aluminum imports. He has threatened worse. The most damaging tariffs would be a 25% tax on Mexican and Canadian imports. A variety of more targeted tariffs are also on the table. The relative buoyancy of the stock market since Trump took office suggests investors think Trump will make various trade deals to avert the tariffs or find other ways to escape most of them.
Tax cuts and deregulation
If investors weren't expecting tax cuts and deregulation, Trump's heavy thumb would probably be causing more upheaval in markets. But investors seem to be pricing in stimulative policies likely to make their mark later this year.
"Much depends on how markets react to Trump tariffs frontloading in the next weeks and months, while markets wait for the core Trump economic growth initiatives to catch up," Terry Haines, founder of Pangea Policy, wrote in a Feb. 19 newsletter.
Trump has already begun cutting red tape in energy, finance, and other sectors. One effect of Musk's eviscerations could be to hamstring regulatory agencies by simply rendering them unable to function normally. Lighter regulation gives companies a freer hand to make deals, borrow, and lend without worrying about the cops showing up to spoil the party.
Congress is already working on a major tax bill that will extend $4 trillion worth of tax cuts due to expire at the end of 2025 while adding new measures Trump has promised, such as eliminating the income tax on tip income, overtime pay, and Social Security benefits. With a tiny majority in the House, Republicans will probably generate some drama as they dicker among themselves about how to make all the pieces fit in a legislative monstrosity that will drive up the national debt and cause fiscal hawks heartburn. But tax cuts are a top Trump priority, and if Trump's Republican allies in Congress have a single job this year, it's fulfilling that mission.
So as long as tax cuts, in particular, appear to be on course, markets may be inclined to overlook the disruption Trump revels in. If anything endangers those tax cuts, markets may pucker. Musk, for now, is a curiosity who's unlikely to rattle markets unless he starts to meddle where the real money is.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
