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Stories that matter about money and politics in the race for the White House
Trump Trade works in the markets. It’s just a bit lost and very messy.
For months, the chance of Donald Trump finding his way back to the White House has been the biggest potential market shake-up nobody wants to talk about. When professional investors ask about it, he usually mumbles something vague about taxes and expenses. “The fiscal programs are roughly the same as Joe Biden’s, so we don’t see a big impact either way, and, you know, historically, elections don’t matter that much.” That’s the script.
This was always weird. Politicians believe this is the most consistent and binary election of our time, and investors say it doesn’t matter who wins.
Neither of the candidates is certainly pushing for deficit reduction. Still, investor enclosures, driven in part, I suspect, by a reluctance to upset the vindictive Republican nominee should he succeed, are now getting tougher — as Trump’s economic policy platform becomes clearer and traders and investors see this ghastly attempt. on his life as increasing his chances of electoral success.
The biggest point of agreement among investors is that Trump 2.0 is inflationary. A massive increase in trade tariffs, a barrage of tax cuts for businesses and wealthy individuals, deregulation and a crackdown on immigration are a clear recipe for higher stocks, sure, but also higher inflation, which is bad for bond prices.
The stock is sticking to this scenario and continues to rise despite all the usual concerns about an already high valuation. But the impact of the inflationary story is much more complicated.
Take, for example, the market movement on Monday – the first trading day after the assassination attempt. The price of long-term bonds initially fell, but the decline was not sustained. In fact, quite the opposite. Ten-year and two-year bond yields fall to their lowest since March as prices and demand rise.
This gets to the heart of the many contradictions of a potential second Trump presidency that make it so difficult for investors to grapple with. The inflationary threat is real, but it flies in the face of data showing that price growth is on the wane for now, and it flies in the face of the populist stance that Trump fully embraced when he chose JD Vance as his VP.
The signal from this choice in America is grim for Ukraine. Given Vance’s previous statements about this conflict, it suggests that support for his defense will quickly fade. It also suggests prolonged chest-beating toward China, which Vance described in an interview Monday as the world’s biggest threat to the U.S. It is therefore no surprise that investors should seek safety in the form of US government bonds – a major asset in times of geopolitical tension. Similarly, Vance said he likes a weak dollar, but the new wave of inflation is dollar positive all things being equal.
So, dude. The Trump Trade is becoming, as Rabobank put it in a recent note, a “Chump Trade,” which continues to undermine anyone looking for a nice clean story.
However, two things are clear. First, the impact of a second Trump presidency – which, we should remember, is still uncertain – is likely to be more pronounced in non-US markets. For many global investors, China is already uninvestable, but if a successful Trump and Vance hold their line, it will potentially remain so for many years. And the global preference for US stocks over Europe is likely to extend, especially if Trump withdraws support for both Ukraine and NATO.
Second, investors need to consider how they would react if Trump crossed the reddest of red lines in the markets and impinged on the Federal Reserve’s independence. “If he goes there, we’re going to see uncertainty and turmoil in the markets,” said Michael Strobaek, chief investment officer at private bank Lombard Odier.
Institutional credibility is difficult to quantify and value. It is, as Salman Ahmed, global head of macro at Fidelity International, said, “a state of mind.” However, once it evaporates, “the watchful bonds awaken.”
How many slivers of a percentage point in bond yields is the Maga Fed worth? How would that stack up to the likely chase for safety among jittery fund managers? In the long run, these are bigger questions than how much U.S. stocks can climb if Trump cuts corporate taxes.
The alarming thing is that investors know they don’t know the answers. Worse, they know there’s only one way to find out. Until then, sitting on the fence may actually be the best strategy.
katie.martin@ft.com