Seeking to implement a ‘Trump trade’ is a hot topic for financial market strategists anticipating some discontinuity in market trends. But it is less easy than one might anticipate.
In principle, two unique factors should help form a clear view of the implications of the US presidential election for policies and, ultimately, the stock market and its sector components: first, both candidates are well-known and already tested as POTUS; second, the ideological gulf between them suggests bifurcating government policies on a wide range of issues.
At the economic level, the Trump agenda is seen as ‘pro-growth.’ This encompasses lower taxes and regulation (incl. less antitrust scrutiny), which translates into a tailwind across sectors, a stronger US dollar, and increased consumer spending. That said, trade tariffs and unorthodox fiscal policies would have economically pervasive counter-effects, as Mr. Roubini argues, as would any loss of independence of the Federal Reserve.
In a pro-growth environment, primary beneficiaries include small caps, large financial institutions (market activity, lower capital requirements), and industries looking to retain their market power or increase it through M&A.
Next, US-orientated industrial companies would benefit from accelerating reshoring trends and related infrastructure spending as Mr. Trump double-downs on MAGA policies. Domestic producers (incl. in tech and food) would benefit from higher import taxes, while US importers (incl. labor importers) and trade partners would suffer from a decoupling policy calling for shorting Europe and China.
After that, the picture gets murkier, with commentators hedging their views quite substantially. Along the renewable energy value chain, industry participants may face some headaches and headwinds (e.g., project approval delays). But a full reversal of the 2022 IRA act is deemed unlikely since many red States are benefiting from it. Note that the electric vehicle value chain may be an easier target. On the other hand, fossil-fuel-powered sectors such as traditional power generation and internal combustion engine car manufacturers may catch a break from environmental policies – but for how long?
US fossil fuel production would get a boost, although an increase in supply would weigh on energy prices. A resolution of the war in Ukraine would further add downward pressure on oil and gas prices.
European defense companies have already experienced a rally, as discussed in ‘Defense & Sustainability.’ The net impact for US contractors is, however, uncertain as they may see reduced demand from the US government compensated by increased demand from European nations.
The difficulty in anticipating US government policies and their economic impact under any president further stems from (i) the uncertain political composition of Congress, which holds the key to lawmaking and funding; (ii) the inherently decentralized nature of a federal system; (iii) the acceptability of promoted policies under prevailing macroeconomic conditions; (iv) corporate political obligations that may not be aligned with value creation; (v) the law of unintended consequences linked to government action; and, to cap it all, (vi) a poor historical relationship between economic policies and the economy.
In sum, the political discourse of the 2024 US elections can easily provide a false sense of visibility about economic policies and their market implications. In reality, it continues to pay for long-term investors, including firms, to take a view that goes beyond a single presidential economic cycle.
PS: Check 538 and RealClearPolitics for the 2024 polls, appreciating their limitations
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