How is a potential Trump presidency affecting markets?

Our News
1

Originally published at: How is a potential Trump presidency affecting markets? – InvestEngine Insights

With markets now anticipating Trump winning the presidential election in November, investors continue to parse his media appearances for clues into policy intentions. The idea being that a clearer picture of his policies can be used to make profitable bets on the affected areas of the market. 

So far, Trump’s intentions include: 

  1. Tariffs (both an increase in the existing tariffs on China, as well as tariffs for other countries)
  2. A weaker dollar
  3. Corporate tax cuts
  4. Lower interest rates
  5. Lower inflation

Unfortunately for Trump, number 5 is incompatible with the other 4 – all of which are inflationary.

Assuming he goes ahead with these policies, the effects on the market should look something like:

  1. A weaker dollar (an explicit aim of Trump’s)
  2. Higher long-term bond yields (as long-term rates rise to combat inflationary pressure caused by tariffs and expansionary fiscal policy)
  3. Lower short-term bond yields (as Trump exerts pressure on the Fed to weaken the dollar)
  4. A boost to the US stock market (through a weaker dollar and tax cuts)

Unfortunately for investors who might be basing decisions off these assumptions, evidence of the Trump trade is slim. At the beginning of May, he was at roughly 50/50 odds of winning the presidency. Since then, he’s reached odds as high as 70%, and now sits at around 60% (odds vary depending on sources). While his chances have improved considerably since then, there’s been little evidence of any impact in the key areas we’d expect based on his proposed policies:

AD_4nXcWc90zCi9JYdXb9ARw9X7oOCPAHBBssunIXtsKBVb_3mCvWOyt0a8KyrS0Xs82O1z2p86oslRwXqtVNfS6fFL6YlbVLHFp9nBOlFI9x4ihWldMbZV4HdPXH-aG-LCrhtmc68jWbj1fLJUk9RMO4nETQQl3.png1394×839 55.4 KB

The S&P 500 had its worst week in months following the assassination attempt (which boosted Trump’s chances), and it also fell after Biden’s COVID announcement (which also boosted Trump’s chances). Looking further back, the market failed to react to either the debate – which hurt Biden’s chances more than any other single event save for his presidential race withdrawal announcement – or Trump’s conviction. Despite being seismic events for the US presidential race, the market’s reaction showed it remained unconcerned. 

While the market has performed well in recent months, the ongoing strength is due more to continuing optimism surrounding tech company earnings, falling inflation, and interest rate cuts than anything Trump has been doing (the recent rotation away from the ‘Magnificent 7’ and into more rate-sensitive smaller-cap stocks is evidence of this). 

Similarly, the US dollar has moved little over the last couple of months, despite a weaker dollar being an explicit aim high up on Trump’s agenda (see his interview with Bloomberg here). 

While it may appear 10-year yields responded to Trump’s conviction at the very end of May, it should be noted that 1) the yield move is in the wrong direction (Trump is supposed to cause long rates to rise), and 2) the 1st of June also saw US PCE inflation data. Rather than Trump’s conviction, it was these inflation figures which caused yields to drop, as investors increased their bets on falling rates. Since then, yields have not responded to any of the significant presidential race events, with 10-year yields at the same level as they were before the debate. 

Ultimately this is a good reminder that what moves markets is changes in companies’ expected earnings, which are not affected directly by presidential odds. While company earnings can be indirectly affected by presidents’ anticipated policy changes, politicians matter less to markets than other factors such as monetary policy and earnings results (which both directly impact earnings expectations). 

Timing the markets should be avoided, doubly so when investors are considering basing their decisions on events as uncertain as a presidential race. Investors remain better off focusing on the long-term, and should avoid making adjustments to their portfolio based on politics.

Important information

Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.

This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.

Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.