What will be Trump’s impact on American markets?
Challenges, potential and unknowns for American markets after Super Tuesday which put Donald Trump in the position to win the Republican nomination. The point of Julian Howard, Lead Investment Director of GAM 's Multi Asset solutions
Super Tuesday put Donald Trump in the almost certain position of winning the Republican nomination. And, as a result, it puts him closer to the White House. Trump leads Biden by two points in the latest Economist/YouGov poll.
Overall, presidential elections have an indefinite effect on the future performance of the stock market, as there are many other factors at play. However, it is worth considering the economic implications of a potential Trump victory, as they are well highlighted.
WHAT WILL A NEW TRUMP ADMINISTRATION DO ABOUT TAXES?
The first thing a new Trump administration is likely to do is extend the 2017 tax cuts. That could help consumers, who remain cautious according to Michigan polls of consumer sentiment.
But for stocks, a hotter economy could be inflationary and the interest rate cuts floated by the Fed this year (three by the end of the year) could be postponed.
Additionally, extending the tax cut will add $3.5 trillion to the deficit, according to the Congressional Budget Office. Higher deficits have historically pushed bond yields higher, due to the higher debt issuance needed and the risk premium demanded by U.S. government lenders. So, at both ends of the interest rate curve, we could see higher yields due to a stronger economy and an indebted government.
With the S&P 500 index relatively expensive at 21.1 times forward earnings and yielding just above that of Treasuries, rising rates could weigh on investor sentiment as they may look to take profits after an extraordinary run from October 2023.
NEW DUTIES ON CHINA?
A further risk for the stock market would be the increase in tariffs on China that Donald Trump has threatened, which would have inflationary implications given the consumption of Chinese goods by the United States. In fact, we believe this threat is very similar to the promise of the wall with Mexico: a signal of intent, but not necessarily something that would be fully implemented, as consumers themselves would suffer.
GEOPOLITICAL RISKS
We haven't talked about geopolitical risks, but it is much more difficult to weigh the risk of a cut in funding to Ukraine or an ambiguous policy towards China and Taiwan, when the economy, earnings and rates have a much more direct impact on the prospects of the US stock market.
Overall, risks to the US stock market, given their valuations, appear to have increased in light of Super Tuesday, with unanswered questions about the deficit and tariffs for investors to consider.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/donald-trump-super-tuesday-mercati/ on Sat, 09 Mar 2024 06:25:17 +0000.