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Opinion
Macroscope
by Nicholas Spiro
Macroscope
by Nicholas Spiro
Why a second Trump term is a risk investors can’t afford to ignore
- Despite lingering memories of the chaos and protectionism of Trump’s presidency, financial markets show little concern about him possibly returning to office
- Investors who downplay the risks of Trump’s re-election ignore the threat he poses to democracy, the global trading system and the independence of the Federal Reserve
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.
According to the results of the latest New York Times/Siena College poll, Trump leads Biden among probable voters in every battleground state apart from Michigan. Moreover, majorities in each swing state believe Trump would do a better job of managing the economy, even though the US has significantly outperformed its main peers since the Covid-19 pandemic erupted.
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.
Another possible explanation, and a more troubling one, is the belief on the part of many on Wall Street that Trump would be better for business than Biden because of his regulation-slashing, tax-cutting agenda.
Trump still has many backers in corporate America who play down his chaotic behaviour and protectionist policies on the grounds that big business has more to lose from Biden’s tax increases and green energy drive. Some corporate leaders even claim a second Trump term would pose less of a threat to democracy and the rule of law than commonly assumed.
While investors are myopic and have been lulled into a false sense of complacency by the safe haven status of US assets, it is remarkable that an election with such profound implications for the United States, the rest of the world and the global economy and financial system seems to be of little significance to most fund managers.
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What if Trump wins?
What if Trump wins?
This is not 2016, when Trump did not have a plan and relied on establishment figures from the military and business to govern. He now knows exactly what he wants to do if he returns to the White House and has a team of advisers and allies ready to implement his agenda. A second Trump presidency would be a dangerous mix of despotism, nationalism, protectionism and isolationism.
While his domestic policies – particularly plans to overhaul the civil service by replacing apolitical administrators with loyalists – would severely undermine US democracy, his foreign policies would eviscerate US security guarantees, leave Ukraine to its own devices and accelerate the fragmentation and disintegration of the global trading system.
Investors who downplay the risk of these threats materialising do so at their peril and are missing the point. Trump’s ability to shape the domestic and international agenda has already caused significant damage by sowing doubts over US policy. Ukraine, which has lost more territory to Russia because of delays in receiving US military aid amid opposition from isolationist Republicans loyal to Trump, has suffered the most.
However, the credibility and independence of the US Federal Reserve – a far more sensitive issue for markets – could be the next casualty. US monetary policy has already become politicised because of concerns that a cut in interest rates just before the election would benefit Biden.
Yet it is a proposal drawn up by Trump’s advisers to clip the Fed’s wings that warrants close attention. A measure being debated would require the Fed to submit its interest rate decisions to the White House in advance. Again, the issue is not whether such a reckless proposal would become law but the danger in allowing the autonomy of the world’s most important central bank to be placed on the political agenda.
Another underappreciated risk is an inconclusive election result. According to a Bloomberg/Morning Consult poll, half of voters in swing states are worried about violence surrounding the election outcome. In a report on May 3, Goldman Sachs said markets were overlooking the timing of when a winner would be determined. The issue is “not who, but when”.
It is good to know some investment strategists are focusing on the election. Unfortunately, they are the minority. It is time investors began to take the risk of a second Trump presidency seriously.
Nicholas Spiro is a partner at Lauressa Advisory
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