Last week, Donald Trump became the first former U.S. president to be convicted of a felony. Despite this historic verdict, Wall Street is considering the potential impacts of a second Trump term on markets, as he remains a strong contender in the upcoming presidential election.
Investors suggest that a Trump victory could boost the stock market and strengthen the dollar. However, his proposed tariffs and extended tax cuts could also spur inflation and negatively affect U.S. government bonds. It’s still early to determine how Trump’s conviction for falsifying documents to cover up a payment to Stormy Daniels will influence his electoral prospects. Trump has stated he will appeal the verdict, which doesn’t prevent him from campaigning or assuming office if he wins.
Recent polls show a tight race between Trump and the incumbent, President Joe Biden, with macroeconomic factors likely to play a significant role. The options market indicates increased volatility around the election, reflecting investor uncertainty.
Market Analysis: Stocks, Bonds, and Currencies
Stocks: During Trump’s first term, the S&P 500 rose by 68%, driven by tax cuts, infrastructure spending, a trade war with China, and the onset of the COVID-19 pandemic. Under Biden, the index has increased by 38% so far. According to LPL Financial, the S&P 500’s performance has been positively correlated with Trump’s election odds this year.
A second Trump administration could be favorable for equities, especially if he prevents the tax hikes proposed by Biden. “With a divided Congress or a Republican sweep, a corporate tax hike is off the table,” said Sonu Varghese, global macro strategist at Carson Group. Reduced regulatory power could also benefit small-cap companies, which often face higher compliance costs.
Trump’s support for fossil fuel production and business-friendly environmental policies could boost the energy sector. However, his aggressive tariff policies, such as proposed tariffs on Chinese goods and a 10% across-the-board tariff, could disrupt multinational companies with significant revenue from China, leading to increased costs and inflation.
Despite these challenges, Trump’s campaign asserts that his economic policies will reduce prices, lower interest rates, and decrease long-term debt, benefiting all Americans, including investors.
Bonds and Rates: While both Republicans and Democrats aim to reduce deficit spending, Trump’s extended tax cuts could exacerbate the U.S. fiscal deficit and increase inflation. This could decrease demand for U.S. debt, pressuring bond prices and raising yields.
John Velis, FX and macro strategist for the Americas at BNY Mellon, commented that Trump’s tax proposals could significantly drain revenues, negatively impacting the bond market. Additionally, increased inflation and fiscal expansion could prompt the Federal Reserve to raise interest rates, further driving up yields.
Trump’s tariff policies could also deter foreign investors from U.S. debt. Foreign holdings of U.S. Treasuries have been increasing, reaching a record $8.09 trillion in March. However, sustained trade protectionism might reverse this trend.
Currencies: The dollar’s performance during Trump’s first term was mixed, falling about 10% against a basket of currencies but also experiencing a 15% rise at one point due to safe-haven demand amid trade policy concerns. Reports suggest that Trump’s economic advisors are considering devaluing the dollar to boost exports, though this could trigger inflation and jeopardize the dollar’s global dominance.
Nonetheless, higher U.S. interest rates and stronger economic growth under Trump’s policies could support the dollar. Jonathan Petersen, senior markets economist at Capital Economics, noted that elevated interest rates and tariffs could keep the dollar strong. Trade-related volatility could also impact currencies like the Mexican peso and Chinese yuan, with smaller European currencies being particularly sensitive to risk sentiment.
Leave feedback about this