After Donald Trump’s rebound in the polls last week, John J. Hardy, Chief Macro Strategist at Saxo, paints a scenario that now has the highest odds according to betting markets: a “Republican victory,” in which Trump not only wins the election but the Republicans retain control of the House of Representatives and reclaim the Senate. Hardy refers to this scenario as “Trump 2.0,” with bookmakers currently giving it a 30% chance of materializing.
Considering the market’s reaction after Trump’s 2016 victory, such a scenario could bring significant benefits to the U.S. stock market. After all, the vision of further tax cuts and deregulation typically sparks optimism. However, some of these positive assumptions could prove misleading, especially when considering the initial market reaction.
“The stock market gained after Trump’s victory eight years ago, though it’s worth noting that trade tensions with China also escalated at the same time. In 2017, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite saw their best performances since 2013. While these figures provide some perspective, we can’t be certain about the impact of a potential Trump victory on the markets this time around. For investors, now is the time to carefully consider what each scenario could mean for their portfolios, and above all, to think about diversification, which is still not a priority for many Polish investors,” says Marcin Ciechoński, responsible for Saxo’s development in Poland.
John J. Hardy’s Analysis of the “Trump 2.0” Scenario
According to John J. Hardy, the only real litmus test for market sentiment regarding this scenario occurred during the summer, when Trump’s poll numbers rose after an assassination attempt in mid-July, followed by his symbolic fist-raising after the incident. The graph below shows how Ford and General Motors shares (indexed to 100 from May 1) rose alongside Trump’s chances of victory, then fell after Biden dropped out of the race. Point “1” marks the day after the June 28 debate, where Biden performed poorly. Point “2” is the first market day after the July 12 assassination attempt, and point “3” is the day after July 21, when Biden announced his withdrawal from the presidential race.
Ford appeared more sensitive to fluctuations in Trump’s poll numbers than GM, possibly because Ford produces nearly twice as many cars in Mexico as GM, making Trump’s stance on tariffs a potential risk to the profitability of production in that country. Nevertheless, GM sells over 80% of its cars in the U.S., while Ford sells about two-thirds of its vehicles there. On the other hand, at the end of July, Ford also published very weak financial results, contributing to a sharp drop in its stock price. Regardless, we can expect the stock prices of both companies to remain sensitive to the election outcome.
Positive Aspects of the “Trump 2.0” Scenario
Expectations for a positive reaction to a “Trump 2.0” scenario are primarily based on the 2016 precedent when the market correctly anticipated significant tax cuts. If this strategy is repeated, sectors likely to benefit from full Republican dominance include:
– American manufacturers with a strong domestic market position: These companies, facing foreign competition, could gain considerably from a Trump victory. New tariffs would increase their competitiveness in the U.S. market. However, it’s worth remembering that supply chains are often global, and domestic investments in new production facilities could also yield good results.
– Large banks and energy companies: In addition to implementing tariffs, Trump promised deregulation for traditional energy firms and financial institutions. Large banks hope that a Trump victory could lead to the repeal of some of the stringent Dodd-Frank regulations introduced after the 2007-09 financial crisis. Like Ford and GM, banks also saw stock value increases in mid-July as Trump’s chances of winning improved.
– Stocks: Trump has pledged to lower corporate taxes to 15% from the current 21%, which would provide an immediate profit boost for all profitable companies.
– European defense companies: A “Trump 2.0” administration would likely further erode confidence in security alliances between the U.S. and Europe and increase the U.S.’s willingness to negotiate with Russia to end the war in Ukraine. This could result in significant European investments aimed at strengthening insufficient defense capabilities.
But What Are the Risks?
“Prediction is very difficult, especially about the future,” as one Danish physicist famously said, and this sentiment perfectly captures the current situation. Predicting how a “Trump 2.0” scenario will unfold in the long term is extremely challenging. However, there are several areas where market optimism could be quickly dampened.
– Trade war risks: This was evident during Trump’s first term when markets frequently reacted to his tweets (now on X.com) regarding actions against China. This time, Trump could take a more aggressive stance on tariffs, potentially leading to confrontations not only with China but also with other major trading partners such as Mexico, Japan, and Europe.
– Strengthening of the U.S. dollar: It’s widely believed that tariffs and stimulating tax cuts will strengthen the U.S. dollar. As a global currency, the dollar’s appreciation poses a risk to global economic growth, particularly in developing countries.
– Inflation risks: U.S. deficits are already enormous, especially for an economy that isn’t in a recession. Additional tax cuts and tariffs introduced by Trump could further drive up prices. Market sentiment could quickly sour if investors believe the Federal Reserve will be forced to keep interest rates high.
– Unstable U.S. debt and high bond yields: After Trump’s 2016 victory, the stock market was able to rise despite interest rate hikes because they started from very low levels. Trump’s policies are seen as inflationary, which could lead to another sharp increase in long-term yields. Currently, interest rates are much higher, but the U.S. debt is also on an unsustainable trajectory at current rates, even without new tax cuts. What new solutions would the Treasury Department and Federal Reserve have to come up with to prevent further rate hikes? The answers are unclear.
– Social unrest: This is one of the hardest areas to predict, but if Trump follows through on his threats regarding the deportation of illegal immigrants, it could cause significant disruptions.
While it’s impossible to predict how the “Trump 2.0” scenario will play out, it is likely to cause the most volatility in the market immediately after the election. At that point, markets will try to anticipate the policy directions that the new president and Congress will implement. It will also be crucial to observe what happens after any initial market surge. On the other hand, the most positive scenario in the medium term might not be “Trump 2.0” but rather a Harris victory with a Republican Senate—essentially maintaining the status quo. Markets tend to react better when politicians have limited room to act.
Source: https://ceo.com.pl/wplyw-potencjalnego-zwyciestwa-donalda-trumpa-na-rynki-finansowe-i-gospodarke-usa-23181
