“No amount of blood or political rancour” can shake the market’s positive mood, says The Economist. From global wars to an escalating trade conflict with China to an assassination attempt, signs of political instability are multiplying.
Yet stocks are “at, or close to, all-time highs in America, the eurozone and Japan”. The widespread belief on Wall Street is that a second Trump presidency will be good for investors.
True, proposed tax cuts and looser public spending might boost profits, but if Trump abandons Nato or initiates “total decoupling from China”, then stocks will not be spared from the resulting “economic chaos”. With stock valuations already “sky-high”, an unambiguously protectionist president would be “a recipe for a crash”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How are markets reacting to Donald Trump's presidency run?
Investors have been piling into assets expected to benefit from a second Trump presidency ever since Joe Biden's disastrous debate performance last month, say Liz Capo McCormick and Natalia Kniazhevich on Bloomberg. Bitcoin and gold have rallied, while US bond yields have climbed on expectations of higher inflation under a Trump presidency.
But Biden’s withdrawal has thrown “a wild card” into the race, which could spell more volatile trading ahead. Investors should always be careful when betting on politics, says Jon Sindreu in The Wall Street Journal.
With the exception of bitcoin, most of the current “Trump trades” are similar to those that investors tried following Trump’s 2016 victory – sell the Mexican peso and buy “smaller, domestically oriented” stocks in “old economy” industries. That approach didn’t really work last time. “Small-caps performed badly” during Trump’s first term, while “industrials, energy and banks” lagged tech. Indeed, there is a good argument that it is not small US companies, but Big Tech – bruised by the Biden White House’s “antitrust zeal” – that would fare best under Trump.
Investors are also hoping for a repeat of Trump’s 2017 tax cuts, which triggered a corporate earnings bonanza. But scope for further reductions is limited, not least given America’s already yawning budget deficit. As Rabobank analysts put it, investors who are confident they know how a second Trump presidency will play out risk seeing their “Trump trade” turn into a “chump trade”, says Katie Martin in the Financial Times.
The one near-certainty is that “Trump 2.0” would be inflationary because of a “huge increase in trade tariffs” and a “volley” of new unfunded tax cuts. The dynamic US economy might manage to sail on, but assets in allies in Europe and Asia could be in for a rockier ride.
And then there is the “reddest of red lines” – hints that Trump may interfere with the independence of the Federal Reserve, the US central bank. Fed independence has been compromised before, says Ernie Tedeschi in the Financial Times. In the early 1970s, Richard Nixon leaned on the Fed to “keep monetary policy easy during his re-election bid”. That left the door wide open to crushing, prolonged stagflation when the 1973 oil crisis hit the following year. Rising US political risk “is likely being underpriced by markets”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Pension warning: one in five don’t know how much is going into their pensionHow to check your pension contributions and why it matters
-
50,000 power of attorney applications rejected – how to avoid common mistakesA freedom of information request shows that thousands of lasting power of attorney (LPA) applications are rejected due to errors. We explain how to avoid mistakes and reveal tips to make the process as straightforward as possible
-
What Trump's presidential election win means for the US economyWhat will Trump's US presidential election win actually mean for Americans and the rest of the world?
-
Media mogul James Dolan takes straight shot at the limelightControversial media mogul James Dolan has been hailed as a visionary for his Sphere arena in Las Vegas. But can he square the circle financially?
-
US election – is the Trump Trade back?The US election is around the corner. How does Trump influence US markets?
-
Shares in luxury goods companies take a hit – will they recover?Luxury goods companies have run into trouble, and the odds of a rapid recovery have receded. What next?
-
United Airlines set for growth – should you invest?Airlines have rebounded well after Covid, but United Airlines can soar higher
-
What will a broken-up Google look like?The US courts have ruled that Google is a monopoly, leaving it facing the prospect of a break-up. WIll that be a good thing?
-
Modi’s reforms set Indian stocks on fireIndian stocks pass a new milestone, but global fund managers are holding back. Are there signs of overheating?
-
Who is John Donahoe, the man who made Nike uncool?Nike’s 48-year success story has been put into question by John Donahoe, its outgoing CEO who knew nothing about Nike or its culture. What mistakes did he make?
