July 19, 2024 - 3 min

U.S. Presidential Election Special: Implications, Risks and Opportunities of Trump 2.0

A second Trump presidency could bring significant changes to the economy.

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  • The U.S. elections are marked by extraordinary and historic events, with the assassination attempt on former President Trump and the ongoing debate over whether President Biden can remain the Democratic presidential nominee, and market participants are now anticipating the possibility of a "Red Wave".
  • Unlike previous election cycles, when the debate centered on which set of policies was likely to be most positive for markets, current scenarios appear to be more neutral, with the potential for significant negative outcomes. A Biden presidential victory would likely be more of the same, given that Congress remains gridlocked and limits the passage of transformative new policies. However, a Trump victory could spur substantial changes in areas such as trade policy (e.g., U.S.-China), foreign policy (e.g., Middle East/Israel, Russia/Ukraine, etc.), regulation (e.g., environment/energy, antitrust) and fiscal/tax policy (e.g., TCJA expiration on 12/31/25).

  • In terms of odds in the betting market, Trump has widened his lead over Biden (especially after the first presidential debate and assassination attempt). Polls in key states also show favorable expectations for Trump. Finally, general election polls also show Trump leading, but by a narrower margin than the betting odds.

  • There are public pressures and calls for Biden to withdraw his candidacy. Today there is a high probability that Joe Biden will heed the calls and drop his candidacy, where Kamala Harris would be the natural successor, but the data show to this day that Harris is not significantly more competitive than Joe Biden after the debate.

  • The narrative of disinflation and monetary easing by the Fed faces few risks through 2024, but there is a lack of consensus on the outlook for 2025, as the election has the potential to generate higher tariffs, higher inflation and higher fiscal spending.

  • A possible Trump victory could be a problem for the bond market, but potentially also for stocks.

  • Market expectations of fiscal expansion, reflation and less regulation under a Trump presidency are driving Treasury yields (a steeper yield curve), since his first term was marked by reflationary tactics, from tariffs to tax cuts.

  • Those tactics were welcomed during Trump's tenure, as evidenced by the stock gains in his first term, but today the situation is very different, as inflation is already a major headwind for consumers in a way that it was not before the pandemic.

  • Thus, we believe we are entering a period of greater uncertainty for equities, but much greater certainty around sustained protectionist policies. (both Trump and Biden made this very clear in the debate) and an era of much higher inflation relative to the 2010-2020 regime.

  • Indeed, now that the election is "moved up", volatility has increased and equities are ending the week with losses of over 2.0% (the Nasdaq has lost 4%), But rather than an indiscriminate sell-off in stocks, what we have been seeing is some "sector rotationBut rather than an indiscriminate sell-off, what we have been seeing is a certain "sector rotation" with selling in technology and AI and buying in more value sectors and mid and small caps, a movement that could also be explained by expectations that the FED will soon start cutting rates.
  • And the effects have also begun to be felt in the dollar. While the dollar index has been rather stable in recent weeks, pressured also by expectations of Fed cuts, emerging exchange rates, especially in Latam, have risen sharply in the last week. The Chilean peso has depreciated close to 4.5% in the week, also affected by the fall in copper due to fears of an escalation of the trade war with China.

  • These moves seem consistent with the likely "winners" of a Trump presidency, that is, longs in banks, energy, healthcare, stronger dollar weighted by trade.

For more details, see the attached report attached.

 

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm