Macroscope | Why a second Trump term is a risk investors can’t afford to ignore

If this year’s US presidential election were held today, former president Donald Trump would probably win. While much can happen between now and November 5, things are not looking good for US President Joe Biden whose approval rating is three points lower than where Trump’s stood at this stage in his administration.

Despite historically low unemployment, buoyant household consumption and a sharp fall in inflation since the end of 2022, Biden has been unable to convince many voters of his administration’s strong economic record. Many factors are at play, including concerns about his age, consumer prices that are still higher than when Biden was elected and, crucially, deeply partisan views of the economy that benefit Trump.

Financial markets have shown little concern about the prospect of a second Trump term. Respondents to Bank of America’s latest global fund manager survey did not even include the election among the top three “tail risks” in markets. While 41 per cent of those surveyed believed high inflation posed the biggest threat, only 9 per cent deemed the election to be the most important risk.

Stock markets are booming as the technology-driven S&P 500 index recently hit its 24th record high this year. Even a gauge of global equities excluding US shares is at its highest level since early 2022. According to Bloomberg data, 14 of the world’s 20 largest stock markets hit all-time highs recently.

There are several plausible explanations for why markets are not worried about the election. It is hard enough for pollsters to predict the result of what is likely to be a close rematch of the 2020 election, which Biden won 306-232 in the Electoral College with a four-point margin in the popular vote. For investors, who are notoriously poor at assessing and pricing political risk, speculating about the outcome is a pointless task, especially since there are still over five months to go before election day.