As we approach a US election at the end of the year the possibility of a re-election of former President Donald Trump is getting real. Indeed, the latest polls show Trump almost exactly neck and neck with current President Joe Biden.
Trump is a radical candidate who has consistently promised to upend the geo-political order and the economic status quo. Arguably, a lack of preparedness meant he was not well placed to carry through his reforms in his first administration. However, this time his team looks ready.
So, what could a Trump victory mean for markets?
1 . No space for a spending spree
When Donald Trump was first elected the markets expected a crash, instead they got a sharp stock market rally. This was because he very immediately committed to a huge spending spree. This looks unlikely this time around. Interest rates are high, and congress is fighting hard to rein in spending. We believe the cost of borrowing and the recent surge of spending from President Biden will prevent him credibly increasing US government spending very much.
2 . So the focus turns to trade
The other major Trump policy priority economically has always been ‘America First’. This idea is built on the belief that the United States is disadvantaged in global trade and needs to impose tariffs on imports to restore the balance. However, few serious economists believe that tariffs do anything other than create inflation and slow growth. For this reason, we believe that overall, the economic effect of Trump will be negative. It could lead to slightly higher interest rates in the United States for example. This will reduce the returns on offer from global bonds.
3 . But don't put your hard hat on yet
This gives us cause for caution and it could lead to some short-term falls from equities, although it is in our view more likely to affect overseas shares than those in the United States. Yet it should not make us despondent. In general politicians have less impact on the path of global economics and trade than many believe at the time. Ultimately, we believe that the global recovery that is getting underway, and the global rally associated with the technology sector and productivity gains can survive a Trump administration, however turbulent that scenario might feel in the short-term. Whether our own nerves can is another matter!