Markets starting to price in a Trump election win

The approach of the US presidential election is focusing the minds of investors on the wider US stocks universe. A great deal is currently riding on the outcome of the vote, and non-US investors have been asking their money managers what the likely impact will be of either a Trump or Harris win.

This year’s election could mark a dramatic shift in US policy, especially if the President and both houses of Congress share the same party after the vote next month. With the election outcome quite uncertain, Election Day on November 5 could bring considerable volatility and new trends.

The 2024 US presidential election stands out due to its unique circumstances: the assassination attempt on Donald Trump, Joe Biden stepping down, Kamala Harris’ quick takeover to name but a few. Historically, the connection between election outcomes and markets has been inconsistent, but these dynamics add uncertainty and could translate into more volatile US markets next month.

For those with a more adventurous mindset, the election may also present opportunities for targeted investments. Finding sectors that could benefit from the election’s outcome can allow investors to capitalise on these opportunities. Some investors will of course be looking to see if the outcome provides further opportunities.

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FX markets starting to price in a Trump victory

At the end of this week it looks like markets are starting to price in a Trump election win, with the USD being bid up in global forex markets.

Most of the anticipation for a positive reaction in the event of Trump 2.0 are based on the 2016 playbook, when the market anticipated and then got big tax cuts, especially for companies. Assuming some echo of the Trump 1.0 playbook, the sectors that will likely celebrate a Republican sweep scenario include US manufacturers, the big banks and fossil fuel energy companies.

US manufacturers with a large domestic market presence and foreign competition could do especially well in the event of a Trump win as Trump’s new tariffs would make them more competitive domestically. Do remember that supply chains are often global, however. Domestic construction for adding manufacturing capacity would likely also do well.

Besides bringing tariffs, Trump has also promised deregulation for traditional energy companies and banks/financial services companies. For banking giants in particular, the hope is that a Trump 2.0 would see the unwinding of some of the strict Dodd-Frank regulations introduced after the financial crisis in 2007-09. Like Ford and GM, banks have also surged on the higher odds of a Trump win.

Trump has promised to cut US corporate taxes further to 15% from the current 21%, an immediate boost to the bottom line for all companies that are profitable.

A Trump 2.0 administration will likely see a further weakening in confidence in the US-Europe security alliances and greater US willingness to negotiate with Russia to end the war in Ukraine. This would likely inspire massive further outlays in Europe to boost woefully inadequate European defence capabilities.

The investment risks of a Trump victory

There are obviously a number of potential risks for investors as well here. Trade war risks were quite prominent during Trump 1.0, when the market would often swing on Trump’s latest tweet about measures against China. But Trump may go bigger and broader this time with tariffs, touching off the risk of a showdown not just with China, but with other large trading partners, from Mexico and Japan to Europe.

It is widely agreed that tariffs and stimulating tax cuts would drive a stronger US dollar. The US dollar is the global currency, and its strengthening is a risk for global growth and particularly emerging markets. US deficits are already massive for an economy that is not in recession. Further Trump tax cuts and tariffs could risk spiking prices further. Market sentiment could quickly sour if the Fed is seen having to keep interest rates at high levels.

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