Donald Trump last week became the first former president convicted of a felony, but Wall Street believes he still has a solid chance of winning the November election and is gaming out how a second term for the Republican candidate could impact markets.
Investors said a Trump victory could broadly boost the stock market and buoy the dollar. His pro-business policies, including deregulation and tax cuts, are generally seen as positive for corporate profits and economic growth, which can drive up stock prices.
However, Trump’s proposed tariffs and extended tax cuts could also stoke inflation and hurt U.S. government bonds, they said. Higher tariffs could increase costs for businesses and consumers, potentially leading to higher prices and inflationary pressures. Additionally, extended tax cuts might increase the federal deficit, leading to higher borrowing costs and lower bond prices.
Market participants said it remained too early to gauge how Trump’s election prospects will be affected by his conviction for falsifying documents to cover up a payment to silence a porn star. The verdict, which Trump said he would appeal – does not prevent the former president from campaigning or taking office if he wins the election.
Recent polls showed U.S. President Joe Biden, a Democrat, and Trump nearly tied in the presidential race, which some believe could be swayed by macroeconomic factors as much as political ones.
The options market continues to price a pickup in volatility around the vote, suggesting investors are bracing for political uncertainty.
Here is an early look at how investors think Trump 2.0 might affect stocks, bonds and currencies.
STOCKS
The S&P 500 rose 68% through Trump’s first term, which was marked by tax cuts and infrastructure spending as well as a trade war with China and the start of the COVID-19 pandemic. The benchmark index is up 38% so far under Biden.
An analysis by LPL Financial on Friday showed the S&P 500, which is up about 9% year-to-date, has risen alongside Trump’s election odds this year, as measured by betting site Predictit. At the same time, Biden’s election odds have remained negatively correlated to the S&P 500 since February, the study showed.
Some investors believe a second Trump term could be supportive for equities, especially if Trump is able to avert tax hikes promised by Biden. Much would depend on the makeup of Congress.
“In a Trump administration with a divided Congress or with a Republican clean sweep, we can say, a corporate tax hike is off the table,” said Sonu Varghese, global macro strategist at Carson Group.
A second Trump White House would also seek to reduce the power of U.S. financial regulators, according to a Reuters report. That could be another positive for stocks, especially small cap companies, which may find it more expensive to comply with regulatory requirements, wrote Stephen Auth, chief investment officer, equities at Federated Hermes.
Trump’s promise to support fossil fuel production and a relatively more business-friendly approach to environmental regulation could also boost sentiment in the energy sector, a Nomura report said.
Tariffs and trade wars, however, are potential spoilers.
Trump has floated the idea of tariffs of 60% or higher on all Chinese goods and a 10% across-the-board tariffs on goods from all points of origin in a bid to eliminate the U.S. trade deficit.
Deutsche Bank analysts said trade protectionism could act as a “negative supply shock,” raising revenues at the expense of weaker growth and higher inflation.
Multinational companies deriving revenues from China or with deep supply chain links there could also be vulnerable, Carson’s Varghese said.
Trump campaign National Press Secretary Karoline Leavitt said in a statement that his “pro growth, anti-inflation economic policies will quickly bring down prices, reduce interest rates, and lower long-term debt levels, which will benefit all Americans, including investors.”
Meanwhile, at least one stock appeared to have an immediate reaction to Trump’s conviction: shares of Trump Media & Technology Group (DJT.O), majority owned by Trump, fell 5% in on Friday.
BONDS AND RATES
Republicans, as well as Democrats, have vowed to reduce deficit spending and debt levels. But Trump policies such as extended tax cuts could contribute to the yawning U.S. fiscal deficit and push up inflation, investors said.
That, in turn, may hurt demand for U.S. debt, pressuring bond prices and driving up yields.
Trump’s tax proposals “would be a big drain on revenues, and I think the bond market wouldn’t react well to that,” said John Velis, FX and macro strategist for the Americas at BNY Mellon.
Inflation and fiscal expansion could lead the Fed to raise interest rates, another path to higher yields, analysts at Nomura said.
Trump’s tariff policies could also hurt demand for U.S. debt among foreign investors, said Christopher Hodge, chief economist for the United States at Natixis. Foreign holdings of U.S. Treasuries surged to a record high of $8.09 trillion in March, rising for a sixth straight month, data from the Treasury Department showed earlier this month.
CURRENCIES
The dollar fell about 10% against a basket of currencies during Trump’s first term. But Trump’s presidency also featured a two-year period that saw the dollar gain about 15%, boosted in-part by safe-haven demand in the face of trade policy worries.
Politico reported, opens new tab in April that economic advisors close to Trump were debating ways to devalue the U.S. currency, a move that could buoy U.S. exports but also spark an inflationary rebound and endanger the dollar’s position as the world’s dominant currency.
Some investors, however, believe the dollar could find support if Trump’s policies lead to higher U.S. interest rates and stronger growth.
“Between elevated U.S. interest rates and tariffs, a Trump presidency could very well keep the dollar stronger for longer,” said Jonathan Petersen, senior markets economist at Capital Economics.
Increased trade tariffs could also spell volatility for currencies such as the Mexican peso and Chinese yuan, which experienced big swings during Trump’s first term, Petersen said. Smaller European currencies including the Swedish krona and Polish zloty could also be affected, since they are particularly sensitive to risk sentiment and likely to be impacted by potential tariffs, he said.
