U.S. Presidential Election and its Impact on the Market
Market Sentiment Shifting Towards Trump
As the U.S. presidential election draws closer, it is increasingly becoming the main focus of the market. While polls do not show a clear favorite, market sentiment seems to be leaning towards Donald Trump. The belief is that a victory for Trump, particularly a Red Sweep, would be unfavorable for bonds, the euro, the yen, the yuan, and the peso, but beneficial for stocks, especially in sectors like financial services, oil, and cryptocurrencies. This is due to the expectation that tax cuts and deregulation would increase profitability. The logic is that less regulation would lead to higher margins, and lower taxes would result in more money returning to investors.
Trump's Campaign and Investors' Expectations
Trump's campaign is centered around tax cuts, deregulation, and tariffs. Investors are focusing on the first two, hoping for another corporate tax windfall in a U.S. economy that is already performing well. Recent data has been impressive, with the S&P 500 reaching a new high of 5,864, and traders are moving into sectors expected to benefit from a potential Red Sweep. However, this optimism assumes that Trump will only deliver the market-friendly aspects of his agenda.
Potential Disruptions
Trump's proposed tariffs, which are more extreme than those implemented during his first term, could cause significant disruptions. Unless suppliers have considerable profit margins to work with, these tariffs could inflate prices across the economy. It is predicted that this could lead to a renewed rise in U.S. inflation to above 4% by the end of 2025, which would prevent the Fed from cutting rates earlier than the market currently anticipates.
Impact of Immigration Plans
Trump's immigration plans, which involve deporting millions of workers, could lead to severe labor shortages. This would result in wage inflation and reduced productivity in industries already facing tight labor markets, driving prices up and slowing potential GDP growth. The economic benefits from tax cuts and deregulation could be negated by the wider damage caused by indiscriminate tariffs and widespread labor shortages. Trump's belief that his tariffs will fund his tax cuts is fundamentally flawed, as tariffs mainly shift surplus from consumers to producers, but do not generate sustainable long-term revenues.
Concerns about the Deficit
Trump's proposals could increase the federal debt by up to $7.5 trillion over a decade, at a time when the U.S. economy is already running a deficit of around 7% of GDP. This would necessitate the government to dedicate a larger portion of its budget to debt servicing. Although this debt is mostly held by U.S.-based investors, it would put additional strain on the federal budget and limit options for countercyclical fiscal policy.
Contrast between U.S. and Europe
The difference between the U.S. and Europe is stark. While the U.S. economy continues to thrive, Europe is stagnating. Long-term growth expectations are at an all-time low of 1.3%, with structural issues such as poor productivity, demographic decline, and over-regulation hindering economic potential. Europe's growth model is broken, and without significant investment and reforms, it will be condemned to "slow agony". The big question is whether Europe has the leadership, money, and willpower to make the necessary changes.
Bottom Line
The U.S. presidential election could have significant implications for the market. While a Trump victory could bring benefits in the form of tax cuts and deregulation, it could also lead to disruptions due to extreme tariffs and labor shortages. Furthermore, the potential increase in federal debt could put additional strain on the U.S. economy. In contrast, Europe faces its own challenges, with long-term growth expectations at an all-time low. What are your thoughts on this? Share this article with your friends and let's discuss. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.
