Following Joe Biden’s poor performance in the TV debate, Donald Trump’s chances of becoming the US President again have increased. The financial markets have already reacted to this news.
In the months following Donald Trump’s election as US President in 2016, many investors saw gains in stock prices.
After the TV debate between the two US presidential candidates, the likelihood of a Donald Trump victory in the fall elections has increased.
A barometer from financial data provider Bloomberg currently puts the probability of a Trump victory at 58% – while the odds of success for the incumbent US President Joe Biden are only at 21%. “Prior to the TV debate, the two candidates were roughly neck and neck here,” says Gero Jung, chief economist at Mirabaud Bank. The incumbent Biden performed poorly in the debate and appeared confused at times. This raised discussions about whether, at 81 years old, he is even capable of serving another four years in office.
The improved chances of Trump winning the election have triggered reactions in the financial markets. Investors pulled out of long-term US Treasury bonds after the TV debate, causing their yields to rise. This can be seen as a preview of potential developments in a second Trump presidency. “The Trump scenario involves: higher risks, higher debts, higher inflation,” says Karsten Junius, chief economist at J. Safra Sarasin Bank.
What would it mean for the stock market and investments if Trump were to win the election? Financial experts and economists provide insights.
1. Increased Government Spending
The rise in long-term Treasury bond yields at the beginning of the week indicates that investors view a Trump victory as likely, according to a representative from investment firm RBC Global Asset Management. The market expects Trump to pursue an expansive fiscal policy. If their finances become less solid, states have to pay higher interest rates. This demonstrates that investors are increasingly concerned about the high US national debt. “The fiscal policy under Trump would likely be even more expansive than under Biden,” Junius comments.
After the COVID-19 crisis and the very expansive spending policies of both Trump and his successor Biden, national debts have significantly increased. According to J. Safra Sarasin Bank, the US national debt currently stands at 124.7% of the American GDP, compared to 106.2% in December 2016. Additionally, the US budget deficit is currently at 6%, while it was “only” 3.1% in 2016. “The situation is different from 2016 when Trump won the presidential elections for the first time,” Jung remarks.
However, neither candidate seems to have a major revision of expenditures on their agenda, as representatives from investment firm Pimco comment in a statement on the TV debate. Regardless of who wins the election, “the budget deficit will remain high in any case.”
2. Decreased Taxes
Meanwhile, Trump has announced plans to make his Tax Cuts and Jobs Act from 2017, which expires in 2025, permanent. Additionally, according to a Safra Sarasin analysis, further tax cuts are planned, which are expected to be partially financed by higher tariffs and reduced spending in certain areas.
Another round of significant, unfunded tax cuts could act as a “short-term sugar rush” for the economy, but could also reignite inflation and increase concerns about the sustainability of national debts.
3. Will Inflation Rise Again?
Moreover, Trump has also announced plans to significantly increase tariffs on imports. “This would clearly have an inflationary effect,” says Jung. The fact that the Republican candidate has pledged to take a more restrictive approach in trade relations with China also supports the argument for higher inflation rates under a Trump presidency. Biden has also made similar statements, though.
Even if Trump follows through on deporting illegal immigrants from the country, this could have an inflationary effect through increased wage pressure. However, as noted in the Safra Sarasin analysis, the number of immigrants at the American borders is particularly high this year.
4. Expectations for Higher Interest Rates
“If inflation were to rise again, this could lead to the Federal Reserve not only not cutting interest rates but even raising them,” says Jung. Currently, very few market participants expect Fed interest rate hikes, as this is still considered an exceptional scenario.
However, economists at Safra Sarasin anticipate that bond yields will structurally remain higher under both Biden and Trump – even higher under the latter. This is because Trump’s planned policies are expected to have a more inflationary effect than Biden’s. Consequently, investors may demand higher risk premiums.
5. Implications for the Rule of Law
Furthermore, a second Trump presidency could have negative consequences for the rule of law and the separation of powers in the US political system. This, in turn, could hinder long-term economic growth.
Jung expects that if Trump were to be elected president again, he would exert pressure on the Federal Reserve to lower interest rates. He had already done so during his first presidency, regularly criticizing Fed Chair Jerome Powell. Junius, however, points out that Trump’s options here would be limited. After all, Trump cannot simply dismiss Powell.
6. Geopolitical Uncertainty
In foreign policy, Trump is seen as more isolationist than Biden. Trump’s unpredictability could lead to negative surprises geopolitically, as stated in the Safra Sarasin analysis. For example, a rapid reduction in American support for Ukraine could cause Russia to expand its aggressive ambitions in Europe. However, it is also possible that Trump could help calm the conflicts in Ukraine and the Middle East.
7. Rising Stock Prices?
During his previous presidency, Trump often measured his performance based on stock market performance and consistently pointed out that stock prices rose during his tenure. Consequently, if elected for a second term, he might take actions to ensure higher stock prices.
In 2017, after Trump’s election, there were significant tax cuts that were well received by the stock markets. Safra Sarasin economists expect that an expansive fiscal policy under Trump could indeed lead to higher stock prices. However, his planned policies could also increase risk premiums and costs for companies, which could have a negative impact on stock markets. The sugar rush could end in a hangover.
“There is still time until the elections, and a lot can happen,” says Jung. For example, it is not certain whether Biden will even run against Trump or if he will withdraw. However, the topic of the US presidential elections is likely to continue to occupy the financial markets in the coming months. Analysts at Julius Baer Bank expect fluctuating political news that may trigger market volatility. Meanwhile, the Federal Reserve is expected to act as a stabilizing force – “these are not bad conditions for risk assets such as stocks.”