Trump's Comeback? How Markets May React

Donald Trump's first term brought tax cuts and stock market gains. But the world is a very different place to 2016. Asset managers are reluctant to name the obvious.

Ollie Smith 18 December, 2023 | 4:08AM
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The possible re-election of Donald Trump is as important to markets and geopolitics as any interest rate decision in 2024. But you could be forgiven for thinking asset managers' outlook documents for next year are somewhat light on the matter.

In the various asset management publications we surveyed, Trump analysis runs to a total of hundreds of words – versus the many thousands devoted to inflation and monetary policy.

Nor did any one document mention the immediate and obvious impact of a Trump re-election on environmental policy, an arena asset managers have found themselves in for the last few years under the guise of ESG investing.

This is not to say the ramifications of another Trump term haven't been acknowledged at all. The success of U.S. equity investors during Trump's first term will humble anyone who thinks another one wouldn't result in more stock market fireworks. But commentators still urge huge caution about the negative consequences.

"The 2024 U.S. election could be a watershed moment geopolitically, as further aid to Ukraine hangs in the balance along with foreign policy unpredictability and rule of law," says Ron Temple, chief market strategist at Lazard Asset Management, "Many investors assume the U.S. will always have the reserve currency of the world and enjoy the 'exorbitant privilege' that comes with such status, given the absence of obvious alternatives today. I would caution against such presumptuousness."

U.S. Long Term Strength Not a Given

Temple says the U.S. will continue having to prove itself. The U.S. originally derived its reserve currency and safe-haven status by proving the resiliency of its institutions, developing a democracy that was largely a question of shades of gray rather than extreme binary choices, and through consistently applied rule of law, he says, "The U.S. also benefited from the absence of viable alternatives after World Wars I and II decimated competitors’ economies. Increasingly, consumers, companies, and countries have more choices. No one should presume the U.S. is entitled to exceptional status without earning it."

Will There be a Rush to Safe Haven Assets?

In hindsight, we now know Donald Trump was always going to be a "stock market" president. Indeed, be it campaign rallies or at the presidential podium, the former reality star and real estate tycoon always made the performance of U.S. equities a central part of his argument that he was making America great again – even if he never said the word equities.

Throughout his first presidency, the Dow Jones industrial average rose by around 56%, a rise driven at least in part by the Trump administration’s rhetoric on tax cuts and deregulation. The annualised Dow return of 11.8% investors will have achieved under president Trump was "the best for any Republican president since Calvin Coolidge in the Roaring Twenties", says Ryan Detrick chief market strategist at LPL Financial, a major U.S.-based independent broker-dealer. 

This is some way off what the most pessimistic commentators predicted in 2016. Today, the world in some ways looks very different, but a fresh Trump term could seek to replicate this formula once more to the benefit – and detriment – of specific sectors.

"Under a new Trump presidency, sectors like traditional energy may benefit from shifts in tax and regulatory burdens, while big tech could face heightened scrutiny," Swiss private bank UBP says in a note on the situation.

Fiscal Expansion?

But what of fixed income and bond yields? During this current inflationary era they should be a mainstay of successful defensive portfolios. Over the last two years, the spectre of US inflation has meant the US Federal Reserve has been right at the forefront of public discourse about control over the economy. What the Fed does next is of vital importance to how financial assets perform in 2024.

This is not to say the controversy over Joe Biden's government's debt ceiling did not threaten a political crisis over government debt. But Trump 2.0, and any accompanying expansionary fiscal policy, promise their own ramifications.

"Late next year, U.S. elections could result in a more fiscally expansionary outcome, another potential catalyst for higher bond yields," says Goldman Sachs.

"Unchecked fiscal spending, as well as increasing deficits further, could trigger a resurgence of inflation, challenging the Fed's control over the economy," UBP adds.

"One option Congress will face at the end of 2025 is a decision on the Trump tax cuts," Bank of America says, "If Congress is serious about correcting the increasingly concerning trajectory of debt-to-gross to domestic product, it would not extend the Trump tax cuts. While this would not be enough fiscal adjustment to correct the current trajectory, it will likely be the first real test of Congress' resolve around the increasingly unsustainable fiscal path."

Trade Wars, the Middle East

And geopolitically, where Biden has been a part of efforts to support Ukraine and manage tensions between China and Taiwan, things may now change dramatically. Not one document mentions the Middle East either, where the Biden administration is attempting to convince the Netanyahu government to temper its military operations in Gaza. One only needs a sliver of imagination to think what Trump may say about it in office – let alone do.

"Geopolitically, tensions between the U.S. and Europe may [also] resurface, with implications for the Russia-Ukraine war," UBP says, "Tightening restrictions on China would also invite retaliation and rekindle the trade wars between the two countries. On the political front, a Trump administration could accelerate the realignment of the global geopolitical order with the rise of the 'global south' and a shift of power from the historical leaders to emerging countries in Europe and the Middle East."

The result? A rush to gold, perhaps. Prices have already hit record highs in recent weeks. "Overall, such destabilising policies may create an opportunity for gold to return as a long-term anchor of wealth preservation in investor portfolios," UBP says.

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Ollie Smith   is editor of Morningstar UK.

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