Pricing in a Trump victory: debt, deficits, and inflation implications: Larry Berman

After the horrific assassination attempt of former U.S. President Donald Trump, the odds of a Republican sweep in November have risen significantly. The immediate market moves on Sunday night were positive for U.S. equities, negative for foreign equities, bearish for longer-term interest rates, a strong move for crypto, and a decline for the clean energy sector. Currency markets were relatively quiet.

We have ordered some of these policy points in order of importance to markets and not any of the social aspects of policy. Immigration is an important labour market influence to be sure, and if we have less of it, it would likely led to higher wages with less labour supply. We are not clear what Trump can do here.

On taxes, Trump will likely try to extend tax cuts that his administration passed in 2017 that expire in 2025. The massive deficits already in place may make this harder to pass the fiscal conservatives in Congress. The long end of the bond market responded bearishly (higher yields) to this overnight as it did following Biden’s debate night performance. Deficits and the cost of capital are probably the most important item in the coming years. The more debt, the higher rates will likely need to be for that new debt to clear the market. It competes directly with demand for all risk assets and equity market valuations.

On the U.S. Federal Open Market Committee (FOMC), we know the independence of the FOMC is key. Trump would like to have the White House influence policy like we see in less democratic and third-world regimes in the world. This would be tragic, and we do not think much will get done here, but it’s worth keeping on the front burner. It would require an act of Congress to change the FOMCs mandate—a very heavy lift. We know that Trump uses the stock market as a barometer for his success. During the early days of COVID-19, he took a bow every time the stock market rallied based on something he may have influenced. In 2017, tax cuts and animal spirits were his narrative. We can expect his decision-making to be leveraged to equity market success, but the deficit/debt issues are magnitudes worse than in 2017 and we do not see the same type of policy moves this time around. In 2018, he called out Jerome Powell, the chair of the U.S. Federal Reserve, for raising rates and hurting stocks. Trump is quick to take a bow and to blame others.

Trump opposes most aspects of climate change legislation, but most of the world disagrees with that view. A Trump White House likely slows the adoption and favours traditional energy. Note the biggest investors in climate change initiatives are the big oil companies. There’s a trade here as the tendency will be to sell (clean energy), in the short run, but longer-term the value will continue to improve as the world is moving in this direction. We do not think Trump 2.0 changes this. Buy the dip here (closer to election).

On foreign policy, this is a major wildcard (there are plusses and minuses). His anti-NATO position and America-first bias are likely inflationary. His more friendly stance towards Russian President Vladimir Putin is a concern to be sure. We will likely see more intensity on tariffs and that will make the Fed’s inflation fighting job much harder. The soft inflation numbers last week and Powell’s focus on labour in his Congressional testimonies caused a shift in market behaviour last week. The MGK (Mega Cap Growth ETF) versus the IWD (Russell 1000 value) has a major swing towards value. A Republican sweep challenges that narrative. I’m watching this performance closely.