By Kel Nwanuforo
All of the controversies. All of the criminal and civil legal cases against him. All of the criticism from opponents at home and abroad, and even from some in his own party.
In the final event, none of it counted as much as the immortal political question: “Do you feel better off than you did four years ago?”
The answer to that question among many Americans was a resounding no.
And now Donald Trump, 45th President of the United States, will also be its 47th.
At the time of writing, President Trump is on track to achieve a bigger victory than he did in 2016. He will also be the first US leader to return to the White House after a defeat since Democrat Grover Cleveland in 1893. Politically, this is certainly quite a moment – a comeback for the history books from a man who had appeared disgraced amid the Capitol riots at the end of his first term.
Still, the politics are a matter for the American people. What, at this early stage, can we say about the potential implications for investors?
The conventional wisdom heading into the election was that a Trump victory would mean higher economic growth and stock prices, but also higher inflation and government borrowing.
At the time of writing on Wednesday morning, the early market moves are consistent with this picture. The primary US stock market is projected to open up by around 2%; the smaller company index by around 6%; and the technology company-focused Nasdaq index by around 2%. Even most UK and European markets are up by between 1-2%, as investors expect US growth will power the global economy.
However, US government bonds have declined in value this morning. This means the interest rates that the government will have to pay to fund its enormous deficit will rise.
The reasons for these two moves likely stem from the same elements of Trump’s platform. Similar to his first term, he plans to deregulate for business while reducing corporate and personal taxation.
The upshot of both of these moves, all else being equal, should be higher economic growth and corporate profits – hence the favourable reaction from shares – but also higher inflation and government borrowing, both of which form a tougher backdrop for bonds.
At least bonds have already repriced downwards quite considerably in recent months on the back of US economic strength and the possibility of President Trump, which may limit further downside in the asset class.
However, keep in mind that under the US system there is also the factor of which party wins the elections for the House of Representatives and the Senate also held yesterday. Victory for the opposing party in either of these can severely restrict a president’s room for manoeuvre on domestic policy.
We already know that Donald Trump’s Republican Party have taken the Senate. But the final result for the House is not yet clear.
In other moves:
- Oil prices are down by around 2% this morning on expectations that a Trump administration will further boost drilling and so expand supply, which is already at a record high. While lower oil prices are broadly positive for consumers, this is a relatively small move in context and prices will continue to move in reaction to geopolitical developments.
- Trump has spoken favourably about cryptocurrencies in recent months and this morning the price of Bitcoin – famously volatile and very high-risk – is running at a record high of over $73,000.
There are perhaps two other key considerations for investors this morning.
One is the geopolitical picture. Trump is noted to be distinctly cooler on aid to Ukraine than Joe Biden and Kamala Harris, which may be perceived as contributing to a less stable global order with even less observance of international rules at present.
Trump and his party are also strong supporters of Israel, which may give licence for the wars in Gaza and against Hezbollah to continue for longer. It is worth noting that markets have been largely untroubled by both conflicts in recent months, though Trump’s stances could perhaps enable slightly higher volatility at the margins.
The other is Trump’s stated plan for a big extension of trade tariffs to ‘protect’ domestic American industry. On the campaign trail, he raised the possibility of an astonishing 60% tariff on goods from China and up to 20% on goods from the rest of the world. While both Trump in his first term and President Biden each expanded tariffs, these moves would represent an enormous broadening which would fly in the face of the conventional economic wisdom that free trade leads to the best outcomes.
It is possible that, in practice, Trump will scale down his plans – he has, after all, been known to exaggerate once or twice in his political career (!) It is also true that there was considerable concern when hefty tariffs, mainly on China and global steel imports, were introduced in his first term – yet global stock markets continued to march higher. Still, it is possible that in the coming days and weeks, markets begin to try and price what the likely implications are here, which could cause some temporary volatility.
The investment conversation around the potential expansion of tariff policy has been interesting. Most talk has focused on how tariffs would increase the cost of goods and services and so, very obviously, add to inflation. It is true that this would be the clear first-order effect. This dynamic has also arguably contributed to the recent repricing of bonds and the downward revision in the number of rate cuts the Fed is likely to deliver over coming months.
Yet there has been much less discussion of the likely second-order economic effects. Tariffs are, quite literally, taxes. A big expansion in tariffs across the board would effectively act as a massive new national sales tax, much like VAT in the UK. This would reduce consumers’ spending power and so eventually have a deflationary impact. It is also unclear that markets have yet fully priced the impact on businesses of a massive increase in their input costs.
This kind of ‘cost-push’ inflation is not the same as the ‘demand-pull’ inflation, over which Fed policy has more control. Jerome Powell and his team would be well aware that higher interest rates would not be able to do anything to ameliorate ‘cost-push’ inflation resulting from tariffs – and that this would in fact be counterproductive. It is possible that, contrary to the current conversation, rates may even have to be lowered more swiftly in this scenario to support demand.
The picture will become clearer over the weeks ahead. But whatever the short-term gyrations that may occur, it is worth remembering that betting against the powerhouse US stock market has rarely been a smart move in recent years – no matter who has been in the White House.
