The lead-up to US presidential elections are frequently volatile affairs. Financial markets attempt to digest each candidate’s policy priorities, which sectors of the economy stand to benefit and constantly adjust to incoming poll data. With the November 2024 election rapidly approaching, to say that the past few weeks have been turbulent would be a colossal understatement. Beginning with the faltering performance of Joe Biden during first presidential debate in late June, we’ve since witnessed an assassination attempt on Donald Trump and Biden’s stunning withdrawal as the Democratic nominee with less than 4 months left until the vote. We frequently argue that in investing, economics “trump” politics, but that does not mean that elections are inconsequential. With the return of Trump to the White House looking increasingly likely, we ponder over the investment implications below.

Global stocks and bonds generally performed well during Trump’s tenure. Despite an equity market crash during the first quarter of 2020 as the COVID pandemic took hold, the MSCI All-Country World Index gained over 60% in Canadian dollar terms during the period. Bond investors initially panicked in response to the Trump victory, with yields spiking on fears that lofty infrastructure spending (“build that wall” chants at Trump rallies spring to mind) and tax cuts would blow out the fiscal deficit and stoke inflationary pressure. These concerns proved to be overblown and global bond yields resumed their multi-decade downtrend in late-2018. The US dollar bounced around during the 4 years but ended approximately 5% and 6% lower versus the Canadian dollar and a trade-weighted basket of international currencies respectively.

That is not to say that it was all smooth sailing. Trump’s trade war against China created significant deadweight economic losses for both sides. Deregulation and tax cuts were a major boon for corporate America, but also set the stage for trouble down the road. The rollback of Dodd-Frank financial sector regulations in 2018 are partly to blame for the US bank failures witnessed in 2023. Lower tax revenues left the government in a weaker fiscal position to dole out stimulus payments during the COVID pandemic, although that clearly did not act as a major impediment considering the significant outlays that were made. Lastly, Trump’s browbeating of multilateral institutions had a destabilizing impact. Trust in the US as an influential global leader and proponent of democratic values, key trade partner and military ally all faltered somewhat during his presidency. It is likely no coincidence that heightened geopolitical tensions and an acceleration of deglobalization trends have followed.

As noted in our recent 5 Minute Macro: Is the Trump Trade On?, Trump’s unpredictability can fuel volatility, but his victory would likely not have a destabilizing impact on financial markets as he is now a known entity. A continuation of low tax rates, a less onerous regulatory environment and a mercantilist bias towards a weaker US dollar should all be supportive of economic growth and corporate earnings. However, the vulnerability of technology-centric US mega-caps is rising. Already priced for near-perfect outcomes, Trump has described them as “too big, too powerful” and almost certainly holds a grudge for being kicked off numerous social media platforms. Per the chart below, as Trump’s electoral odds surged, sharp market rotations from growth to value and large to small-cap stocks have occurred.  

The continued strength of the world’s largest economy and a weak US dollar would be a potent combination for cyclical assets such as international and emerging markets stocks and commodities. A broadening of performance away from US mega-caps would be a very healthy development for global equity markets. Hostile trade actions will be a key risk to watch, particularly for China, which has become a bi-partisan nemesis in the US. While a second term for Trump is far from guaranteed at this point, a raucous few months leading up to November is a near certainty. Stay tuned!

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