Quick Bites | What might a Trump victory mean for markets?

With former President Donald Trump winning the Iowa caucuses and the New Hampshire primary by big margins, it’s very unlikely that Nikki Haley will disrupt his path to becoming the Republican candidate in November. And so, much to the irritation of many, a Trump-Biden rematch in November is on the cards. If Trump were to win, as the betting markets are now suggesting, what would this mean for investment markets? While the election is still 9 months away, it’s worth thinking about. 


The infamous Trump mugshot 

Source: Google Images


Many of the worst expectations of Trump 1.0 were not realised – at least not on the economic front. The disruption of the pandemic, then post-lockdown recovery, the unexpected surge in global inflation, and then the march of central bank rate rises – makes comparisons with Biden’s term unusually difficult. Where would the US economy find itself with Trump 2.0? 


While speculative, it’s interesting to consider a few issues. 


Firstly, Trump is unlikely to have changed his spots much: like most Republicans, he tends to favour small government, tax cuts, lower social security, less environmental regulation and protection, minimal restrictions on business, and he doesn’t mind debt too much.  


But economic conditions have changed markedly since Trump’s first term. For the past two years, the Federal Reserve (Fed) has been ratcheting up rates and trying to bring down inflation amidst a very tight labour market. Though it has nearly succeeded, and a soft landing appears in sight, the labour market remains stretched. As a result, the economy might be vulnerable to overheating. 


The US federal budget is in worse shape, too. In 2016, at the start of Trump’s presidency, the annual deficit was 3.2% of GDP and debt was 76% of GDP. The forecasts for 2024 are 5.8% and 100%, respectively. Should Trump once again pursue tax cuts, the Fed will have to hike rates to offset the stimulus, making it costlier for businesses to raise capital and for the government to service its growing debt. 


The Fed is supposed to be independent, but would Trump respect that? The next president will have a chance to nominate a new chair in May 2026; Trump could nominate a stooge, and a pliant Republican Senate could indulge him. The risk of more inflation would surge, perhaps exacerbated by more tariffs, which would slow growth. Trump has shown that he does not overly respect America’s public institutions or conventions. 


Trump also has protectionist instincts. Members of his team have floated the idea of a 60% tariff on imports from China, and new tariffs on the EU. This would be highly inflationary. He seems to regard any country that enjoys a trade surplus with the US as an adversary. 


Countries on Trump’s hit list 

Source: The Economist 


Of course, there are many other issues to consider. On the geopolitical front, Trump is not a big fan of the North Atlantic Treaty Organization (NATO, also called the North Atlantic Alliance, is an intergovernmental military alliance of 31 member states), and thinks European countries spending less than 2% of their GDP on defence are ‘freeloading’ on the US (and here he is not wrong); he may withdraw support of Ukraine and Taiwan in exchange for some deal with Putin or Xi Jinping. Environmentalists and many companies like the US federal government’s support for renewable energy, which Trump calls ‘the Green New Scam’. He has promised the biggest deportation scheme in American history to reduce the number of illegal immigrants in the country. This would presumably be a shock to the already tight labour market.

Predicting what Trump would actually do is very hard. He has few fixed beliefs and no true guiding ideology – the opposite of a Reagan or Thatcher. He is often driven by personal animus or vainglory. Businesses say that what they fear most is uncertainty; with Trump that is guaranteed.

The following extract from the recent Goldman Sachs Macro Research report (24 Jan 2024) is worth reading:

“We find that a Trump victory—especially if paired with a Republican sweep in Congress—would likely increase the chances of a stronger USD, higher breakeven inflation rates, higher yields, and a steeper yield curve, and may also increase the tails in both directions for energy prices. This combination of commodity price risks, higher yields, and a stronger USD also makes EM asset underperformance more likely, in our view.

On the equities front, we find that US stocks tend to generate strong returns in the weeks following the presidential election regardless of the outcome as uncertainty dissipates. As for European stocks, a Trump presidency would likely increase the risks of higher tariffs on Europe and a reduction in US funding for Ukraine, both of which would be significant negatives for European equities, in our view, especially for the DAX, MDAX, and cyclical sectors that are highly correlated to world trade.”



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