Wall Street Tests Market Fallout of a Trump-Biden Rematch

(Bloomberg) -- This much is clear for the financial markets: The US presidential election is likely to usher in a bumpy end to 2024.

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Futures on the VIX Index — known as the fear gauge — show traders are already preparing for the risk of stock-market swings around the November vote. Analysts say the US dollar may rise — at least temporarily — as investors shift into havens. And bond traders are mindful of a potential repeat of 2016, when Donald Trump’s victory triggered a selloff on worries that tax cuts would push interest rates higher by pouring fuel on an already growing economy.

But beyond that, the longer-term implications for stocks, bonds and currencies are difficult to predict, complicating efforts to provide a clear-cut playbook for how to best position for one outcome or the other.

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A victory for President Joe Biden, as is the case with incumbents, would likely have less financial-market impact simply by keeping the current course on track. By contrast, Trump and his advisers have floated plans — on immigration, trade, taxes and the Federal Reserve — that could significantly alter the current calculus — though at this point little if any of that appears to be priced in.

Then there is another wildcard: Late Thursday, a New York jury found Trump guilty of 34 counts of falsifying business records to conceal a hush-money payment to an adult film star ahead of the 2016 election, making him the first former US president to be convicted of crimes.

“Markets do not like uncertainty,” said Steven Blitz, chief US economist at TS Lombard. “There’s a lot of pre-game posturing going on.”

The stock market has tended to advance under presidents of both parties, influenced more by the direction of the economy and interest rates than by fiscal policy. Trump and Biden were no exception.

Still, UBS strategists led by Solita Marcelli wager that a Democratic sweep of the White House and Congress would be the weakest outcome for the stock market overall, given Biden’s interest in raising the corporate tax rate. A Republican sweep, they said, would likely be more welcome by promising lower taxes and lighter regulations — though some of that could be offset by concern his policies will fan inflation, disrupt global trade, and keep interest rates elevated. The impact would be more limited if either had to contend with a divided Congress.

Teslas, Chips and Trade

In some key industries, the impacts are a little more clear cut. Biden has sought to hasten the shift to electric vehicles, while Trump has lashed out at the industry. That’s upped the stakes for manufacturers like Tesla Inc., Rivian Automotive Inc. and Lucid Group Inc., as well as battery makers and parts suppliers. All of them would likely be affected if Trump rolled back tax credits extended to buyers.

While Biden has increased tariffs on Chinese imports, Trump has floated going even further — with duties of 10% on all imports and 60% on those from China. That would either push up consumer prices or crimp profit margins for companies like retailers and electronics makers that are particularly dependent on imported goods.

Evercore ISI’s Sarah Bianchi, who worked as a trade official in the Biden administration, said markets don’t appear to be factoring in the impacts of Trump’s trade plans. But she said if Trump continues to lead in the polls “the markets could have a hard time discounting a ‘Trump 2.0 trade war risk.’”

While US crude oil production boomed under Biden, petroleum companies are expected to get a boost if Trump wins, according to JPMorgan Chase & Co., given the likelihood he would target climate regulations and open up more federal land to production. JPMorgan’s basket of energy stocks positioned to benefit includes Baker Hughes Co., Exxon Mobil Corp., ConocoPhillips, Occidental Petroleum Corp. and Williams Cos Inc.

The Dollar Gains

The direction of the US dollar is also at stake. It has climbed this year on speculation that the Fed will keep interest rates elevated. But Trump’s advisers are said to have debated ways to devalue the currency, which could spur exports but worsen inflation by making imports more costly.

The dollar can also function as a haven during periods of uncertainty. Some analysts have said that will likely bolster the dollar temporarily, as has tended to happen before past US elections. Moreover, JPMorgan and Barclays analysts say Trump’s tariff plan would provide a near-term boost to the currency by promising to curb the outflow of dollars to businesses overseas.

Wells Fargo strategists also see “rising 2024 US election uncertainties” and a possible slowdown in US economic growth as supportive of the dollar. The team including Aroop Chatterjee and Erik Nelson wrote that the Chinese yuan, Mexican peso and euro will be particularly vulnerable versus the greenback “if poll margins shift in favor of Trump,” they added.

Bonds Under Pressure

The US bond market was hit by another run of losses for much of this year as the economy’s surprising resilience drove traders to sharply dial back bets on rate cuts.

That’s raised the risk of a repeat of what happened in 2016, when Trump’s surprise victory sent bond yields surging on expectations that his tax-cuts would pressure the Fed to raise rates. The central bank went on to nudge up borrowing costs during much of Trump’s term.

Trump wants to keep his 2017 tax cuts from expiring at the end of 2025 and at a recent rally said he’d deliver a “middle class, upper class, lower class, business class big tax cut.” Biden, by contrast, has said he would offset the deficit by raising corporate levies and ensuring that billionaires pay an income tax of at least 25%.

Bill Gross, co-founder of Pacific Investment Management Co., told the Financial Times that a Trump victory would be “more disruptive” to the bond market given his tax-cut stance.

“The question is whether the fiscal impulse picks up,” said Noel Dixon, a macro strategist at State Street. “Under a Trump election, that’s more likely to take place.”

At the same time, Trump’s tariffs and intentions to aggressively seek to deport those working in the country illegally could fan inflation by pushing up import prices and wages.

Then there’s the Fed itself. While Trump elevated Jerome Powell to the post of Fed chair, he went on to repeatedly criticize the central bank chief for raising rates or not cutting them fast enough. Trump said he wouldn’t reappoint Powell after his term as chair expires, but former Trump adviser Peter Navarro recently predicted in an interview with the online news site Semafor that Powell “will be gone in a hundred days one way or the other.”

State Street’s Dixon said that Trump would probably have a preference for “someone who will pursue lower rates.”

That could have the opposite effect in the bond market, however. Dixon said pressure to get the Fed to cut rates prematurely would likely fan worries about inflation, pushing long-term Treasury yields higher.

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