Impact of a Trump victory on the stock market, inflation, stocks, debt

After the TV debate between the two US presidential candidates, the likelihood of Donald Trump winning in the fall elections has increased.

A barometer from the financial data provider Bloomberg currently puts the probability of a Trump victory at 58 percent – that of the incumbent US President Joe Biden’s success is only 21 percent. “Before the TV debate, the two candidates were roughly even,” says Gero Jung, chief economist at Bank Mirabaud. The incumbent Biden performed poorly in the debate and appeared confused at times. As a result, discussions arose as to whether he would be able to hold the office for another four years due to his advanced age of 81.

The improved election chances for Trump have also triggered reactions on the financial markets. After the TV debate, investors withdrew from long-term US government bonds, which caused their yields to rise. This can be interpreted as a foretaste of possible developments in a second Trump presidency. “The Trump scenario is: higher risks, higher debt, higher inflation,” says Karsten Junius, chief economist at Bank J. Safra Sarasin.

What would it mean for the stock market and investments if Trump won the election? Financial experts and economists provide information.

1. Even higher government spending

The rise in long-term government bond yields at the beginning of the week shows that investors see a Trump victory as likely, a representative of the investment company RBC Global Asset Management said in an analysis. The market expects an expansionary fiscal policy from Trump. If their finances become less solid, states will have to pay higher interest rates. This shows that investors are increasingly concerned about the high national debt in the USA. “Fiscal policy would probably be even more expansive under Trump than under Biden,” says Junius.

After the Corona crisis and the very expansive spending policy of Trump and his successor Biden, national debt rose sharply. According to the Bank J. Safra Sarasin, they now amount to 124.7 percent of the American gross domestic product; in December 2016 it was 106.2 percent. In addition, the US budget deficit is currently 6 percent, whereas in 2016 it was “only” 3.1 percent. “The starting position is different than in 2016, when Trump had already won the presidential election once,” says Jung.

Neither candidate seems to have a major revision of spending on the agenda, comments representatives of the investment company Pimco in a statement on the TV duel. Whoever wins the election, “the budget deficit will remain high in any case.”

2. Falling taxes

Trump, meanwhile, has announced plans to make his 2017 Tax Cuts and Jobs Act, which expires in 2025, permanent. In addition, according to a Safra-Sarasin analysis, further tax cuts are planned, which will be at least partially financed through higher tariffs and reduced spending in certain areas.

Another round of large, unfinanced tax cuts could have the effect of a “short-term sugar rush” on the economy, they say. But they could also fuel inflation again and increase concerns about the sustainability of national debt.

3. Is inflation rising again?

Trump has also announced that he will significantly increase tariffs on imports. “That would clearly have an inflationary effect,” says Jung. Another point in favor of higher inflation rates under a Trump presidency is that the Republican candidate has announced that he will be more restrictive in trade relations with China. However, Biden also did this.

Even if Trump gets serious about expelling illegal immigrants from the country, this could have an inflationary effect through higher wage pressure. However, the number of immigrants at the American borders is particularly high this year, according to the Safra-Sarasin analysis.

4. Higher interest rates expected

“If inflation were to rise again, this could conversely lead to the US Federal Reserve not only not lowering key interest rates, but even increasing them further,” says Jung. At the moment, hardly anyone on the financial markets is expecting Fed interest rate increases; this is still considered an exceptional scenario.

Safra Sarasin economists, meanwhile, expect bond yields to remain structurally higher under both Biden and Trump – even higher under the latter. This is because Trump’s planned policies are likely to have a more inflationary effect than Biden’s. As a result, investors are likely to demand higher risk premiums.

5. Consequences for the rule of law

It is also said that a renewed Trump presidency could have negative consequences for the rule of law and the separation of powers in the US political system. This, in turn, could hinder long-term economic growth.

Jung expects that if Trump is elected president, he will once again put pressure on the US Federal Reserve to lower key interest rates. He had already done this during his first presidency. He had regularly criticized Fed President Jerome Powell harshly. Junius, however, points out that Trump’s options here would be limited. After all, Trump couldn’t simply fire Powell.

6. Geopolitical uncertainty

When it comes to foreign policy, Trump is considered more isolationist than Biden. Trump’s unpredictability could cause negative surprises from a geopolitical perspective, according to the Safra-Sarasin analysis. For example, a rapid reduction in American support for Ukraine could lead to Russia expanding its military ambitions in Europe. However, it cannot be ruled out that Trump could help calm the wars in Ukraine and the Middle East.

7. Rising stock market prices?

During his last presidency, Trump often measured his performance heavily by stock market performance and consistently pointed out that prices rose during his time in office. As a result, he could do a lot to ensure higher stock prices during a second presidential term.

In 2017, after Trump’s election, there were significant tax cuts that were very positively received by the stock markets. The Safra-Sarasin economists expect that an expansionary fiscal policy under Trump will certainly ensure rising stock prices. However, his planned policy could also increase risk premiums and costs for companies, which in turn would be negative for the stock markets. The sugar rush could then end in a hangover.

“It’s still a long time until the elections and a lot can still happen,” says Jung. For example, it is not at all certain whether Biden will even run against Trump or whether he will withdraw after all. However, the topic of the US presidential elections is likely to continue to preoccupy the financial markets in the coming months. Analysts at Bank Julius Baer are expecting changing political news, which is likely to trigger fluctuations on the financial markets. In the meantime, the Federal Reserve is likely to act as a stabilizing force – “these are not too bad conditions” for risky assets such as stocks.