Wealth Insights | Weekly Market Analysis | Economy/Politics
Weekly Market Analysis - Markets Preview a Trump Administration
Posted on3 Things to Know
After Events, Trump Pushes Lead in White House Race
Two discrete events – an act of political violence and a Presidential debate – have caused polls and prediction markets to sharply upgrade the probability that Donald Trump will win the November election. These clear market moves reveal how investors view Trump’s impact on policy and the economy.
US SMIDs, Cyclicals Led in Response
The immediate response was to boost US domestic small caps and cyclical industry shares, with banks and energy stocks the strongest sectors. In contrast, clean energy, China and European shares fell.
Treasury Yield Curve Steepens; Tax Cut Prospects Increase
The Treasury yield curve steepened as investors viewed a Republican sweep in Congressional elections as more likely, raising the odds of tax cuts along with other inflationary policies.
Note: President Joe Biden has just announced he was dropping out of the Presidential race and has endorsed Vice President Kamala Harris for the Democratic ticket. The latest in our “Our Road to the White House” series on the impact of President Biden’s decision is upcoming.
Summary
The first assassination attempt of a US President or Presidential candidate in more than 43 years stands as a stark reminder of the polarization gripping the nation. The loss of an innocent bystander’s life in the incident adds to the collective shock.
During such events, financial and prediction markets are constantly (and coldly) assessing the impact on potential future economic and corporate outcomes. According to PredictIt, a market that assesses election probabilities, former President Donald Trump has risen to a 67% chance of being elected in November following the July 13 attempt on his life at a campaign rally. This is up 7 percentage points and up 15 points since the June Presidential debate when worries over President Biden’s performance surged.
Equity, bond, and foreign exchange markets have all reacted swiftly to shifting probabilities, providing us a window into the market’s assessment of potential winners and losers.
Portfolio considerations
Enlarged trade tariffs (and immigration restrictions) may be a given under a Trump administration. Congressional action on taxes is far less certain. New “filibuster-proof” legislation would need to pass to prevent personal income tax cuts from expiring at the end of 2025. New taxes on imports (tariffs) may come first. The impact would be tighter, not easier
fiscal policy for at least a time. Deregulation is potentially quite effective medicine for business confidence and investment. However, for the energy industry, even stronger US oil output could reduce oil prices, weakening profits. Amid the possibility that OPEC will increase supply at the same time, we have removed US energy producers from our Outlook 2024 top potential opportunities list after a 17.8% gain since December 7.
Source: Bloomberg, July 16, 2024. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees, or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.
After Events, Trump Pushes Lead in White House Race
According to PredictIt, a market that assesses election probabilities, Republican candidate and former President Donald Trump has risen to a 67% chance of being elected in November following the July 13 attempt on his life at a campaign rally. This is up 7 percentage points and up 15 points since the June Presidential debate when worries over President Biden’s performance surged. While other factors beyond politics – the trajectory for the economy, profits, central bank policy, and trends in AI – will arguably matter more to the trajectory for markets in 2025, election themes are likely to dominate the market narrative over the next few months.
In Response, US Banks, SMIDs, Cyclicals Led
To assess the market’s views, we analyzed the specific reactions in the trading sessions immediately following the June Presidential debate and the assassination attempt. Both days saw similar market reactions, with US small caps, banks, and energy shares perceived as winners while Chinese equities, clean energy and utilities stocks underperformed.
Banks and traditional energy stand to potentially benefit from potential deregulation of their respective industries. US banks currently face the prospects of much higher capital requirements to align with Basel III global standards, but these rules could get watered down in a Republican administration (Federal Reserve officials have already suggested changes were to come). Meanwhile, Trump has promised to reduce red tape when it comes to new oil and gas projects in the US.
Domestically-oriented small cap stocks could benefit from a pro-business administration. They also could be more insulated from a potential trade war than larger multinationals, including retaliation to tariff steps by the US. Turning to the biggest potential losers, investors remain cautious about the outlook for Chinese equities. While the Chinese equity sell off last week was in part driven by concerns about weaker domestic data, China is also likely to face the brunt of Trump’s trade policy. Candidate Trump has vowed to place 60% tariffs on all Chinese imports to the US if elected. At the sector level, rising odds of a “red sweep” have also put pressure on stocks tied to renewable energy, with clean energy shares down 4% following the attack on Trump. Republicans have vowed to repeal the Inflation Reduction Act, which despite its name mostly provided subsidies for clean energy projects.
Treasury Yield Curve Steepens; Tax Cut Prospects Increase
The Republican Party’s agenda may include very broad shifts in policy that could also potentially impact the fixed income market. First, domestic economic policy is likely to be viewed as highly “protectionist” and potentially inflationary in multiple ways, assuming it largely conforms to the platform adopted this week at the Republican convention, and that Republicans win both houses of Congress.
Importantly, tax cuts enacted in 2017 are set to expire at end 2025. The Congressional Budget Office has estimated that a permanent extension of the lower Federal Income tax rates and other measures would add over US$4 trillion to budget deficit estimates over the next decade, more than a 10% increase over current debt levels. Candidate Trump wants further tax cuts and other measures (e.g., no taxes on “tips”).
Another policy push may be that the new Administration tries to actively weaken the dollar. While there are too many hypothetical policy shifts in this respect to analyze (for example, a tax on financial flows into the US), the broad thrust of this policy mix would be to encourage reshoring of manufacturing and increase American exports.
OUTLOOK UPDATE: Oil prices have historically been a primary driver of energy sector equity market performance. As we
have expected, the gains in output for western producers at the expense of OPEC has helped boost their share performance beyond what might be expected from the oil price alone. The S&P 500 Energy sector is reasonably valued at just 12 times expected year-ahead earnings, but earnings growth could face challenges if oil prices materially retreat. As a result, we’ve decided to move this opportunistic investment idea to the sidelines after a 17.8% gain, as we monitor unfolding events.
