“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”.
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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”.
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