The countdown to the United States presidential elections in November has begun and Donald Trump is already emerging as a strong Republican candidate. Also as a serious contender for the White House, a return that would put a volcanic business magnate at the head of the world's largest economy with four open criminal cases–including his involvement in the insurrection and assault on the Capitol in January 2021–, capable of straining coexistence in his country to the limit and unbalancing, even more if possible, the fragile play of forces in international politics. Trump can be an unpredictable time bomb politically and also economically. His arrival to power in November 2016 already represented an unexpected shock for the financial markets, which quickly recovered from the initial losses, and in which Trump's mandate finally left a juicy balance of capital gains.
The possibility of him achieving a new mandate in November comes, however, at a very different economic moment, but for which the economic recipe proposed by Trump remains the same: fewer taxes and more tariffs. A tandem that would undoubtedly aggravate the problem of public debt and deficit that the US economy is already suffering from and that would rescue inflationary tensions at the least opportune moment, just when a cycle of rate cuts is expected to reduce the pressure on households. and companies after the most intense rise in the price of money in the last 40 years.
A hypothetical return of Trump to the White House has already put some managers on alert and an increase in volatility in the months leading up to the presidential elections next November is already taken for granted in the financial market. The fear that is already circulating in part of the market is that what happened in November 2016 could be replicated, when US bond yields soared in the weeks after Donald Trump's victory. The 10-year bond rose from 1.8% shortly before the elections to 2.65% in mid-December, in what was the steepest rise in seven years. At that time the Fed was at the beginning of a rate raising cycle and had only carried out one hike at the time of the election. Now, the world's most influential central bank is at the opposite point. On the verge of finally managing to short-tie inflation to begin lowering rates. As long as no surprises arise that prevent the opposite.
Echoes of November 2016
At DWS they hope that, in the event of Trump's victory, the distortion in the market will not be like that of 2016. The surprise effect would be smaller and the markets could probably have discounted that scenario earlier, “which does not mean that it is not likely.” that bond yields will generally rise.” The manager recalls that Trump has announced that he will impose a 10% tax on products imported by the United States and that he will maintain the tax cuts that he himself established in 2017 and that have contributed to boosting growth and prices. Two measures that entail inflationary risk and that “together with the experiences of Trump's first term, in our opinion, provide sufficient arguments to obtain higher returns in the event of his election,” they add in DWS.
This 10% tariff on exports to the United States from all countries is one of the star measures of the still aspiring Republican candidate for the White House. It is a quantitative leap in his protectionist policy compared to what he did when he came to power in 2016, when he began by establishing tariffs only for China and for specific products such as steel. Pedro del Pozo, director of financial investments at Mutualidad, remembers that protectionist policies and tariffs usually generate inflation. And he warns that “given the importance of the United States as the locomotive of the world, a contagion of these rising prices is possible. “This would be very serious, if it occurred, at a time when inflation is far from being contained and rates remain high.”
Orla Garvey, senior fixed income manager at Federated Hermes, agrees that, assuming Trump sticks to the script of his last term, “we could expect an increase in tariffs – with China and Europe apparently in his sights –, cuts of taxes and greater potential for fiscal expansion.” And she points to a fundamental issue that is already dragging down the US economy, beyond whether or not new tariffs will be imposed on imports. “In the current environment of large deficits that need to be financed, this would likely mean that investors would demand more term premium to support US debt,” she warns.
“The US deficit situation is already serious”, according to the fixed income strategist at J. Safra Sarasin Sustainable AM, Alex Rohner. The Congressional Budget Office, a sort of American Airef, has already warned that if budgetary policies are not modified in the coming years, the US debt-to-GDP ratio will grow from 100% to almost 120%. % in 2033.
More public deficit
The lower taxes advocated by Trump predict a greater budget deficit, a threat to which Joe Biden would not be immune in a new term. “If the US public deficit grows, there may be more pressure on interest rates. But the situation of fiscal deterioration that is expected for the US economy is expected both with Biden and Trump,” points out Ricard Murillo, economist at CaixaBank Research.
The specter of the deficit haunts Democrats and Republicans alike. The former are under pressure to avoid the expiration of expanded health insurance subsidies, which end in 2025. And Republicans face the end of the Trump-era tax cuts, which also expire at the end of next year.
According to calculations by Generali Investments, an agreement that permanently extends the fiscal priorities of both parties would result in an increase in the US public deficit of at least $1 trillion through 2033. Democratic policies could widen the deficit on the spending side and the Republicans, by income. Of course, Trump's preference for tariffs can be a differentiating element for the bond market. “Democrats are likely to continue to prefer subsidies and regulation, while a Republican administration would likely impose more tariffs on the rest of the world, raising inflation,” concludes Paolo Zanghieri, senior economist at Generali AM.
In any case, and as pointed out in CaixaBank Research, the taxes not only have an inflationary variant but can be a trigger for lower growth. “Increasing tariffs would have an inflationary effect and would also be negative for growth. In 2019, in the middle of the trade war during Trump's mandate, the Fed already lowered rates largely due to that trade tension,” explains Ricard Murillo.
The relationship with Powell
The candidate who wins in the November presidential elections must appoint a new president of the Federal Reserve. Jerome Powell's term ends in 2026 and Trump has already stated that, if he comes to power, he would not renew him in office. What's more, he accused him of planning interest rate cuts to favor the re-election of Biden, who renewed Powell for a second term. But the Federal Reserve is hardly going to maintain a position of neutrality – in which it will not touch interest rates in the months prior to the elections so as not to favor or harm any of the candidates. A path of cuts of 75 basis points has already advanced throughout this year, so that financial markets, companies and consumers can anticipate these cuts – advanced even excessively by investors – and adjust their decisions accordingly. During his tenure, Trump already pressured Powell not to raise rates and, if he wins in November, he will try to pressure him to lower them, according to Alex Rohner. A new fight for the independence of the most influential central bank in the world would be assured.
For now, the current economic situation in the United States could favor the re-election of the current Democratic president, in the opinion of George Brown, an economist at Schroders. “Biden has many reasons to be optimistic about his re-election chances. In addition to the advantage of his current position, he is overseeing a strong economy, a restrictive labor market and slowing inflation,” he notes. However, despite these elements in his favor, the current president continues to have low approval ratings.
Joe Biden's candidacy for the White House has yet to be officially finalized, although everything indicates that he will once again measure his strength against Trump, in a very close race and in an increasingly polarized country. The result of the elections will undoubtedly have a shock wave on the global economy and world order, or disorder.
Advantages for the investor of a divided US Congress
In addition to the occupant of the White House, 435 seats in the House of Representatives and 34 of the 100 seats in the US Senate are also in dispute in the November elections. The true victory for the winner of the presidential elections will also be to have a majority in the legislative branch that smoothes the implementation of their electoral programs.
“Historically, a majority split in Congress tends to be best for markets. Probably because this requires bipartisan decisions,” says Stefan Hofrichter, director of Global Economics and Strategy at Allianz Global Investors. Thus, in this scenario the most extreme proposals do not go ahead. According to Schroders, since the 1948 presidential election, US equities have recorded an average total return of 14.3% when a president has had to deal with a divided Congress, compared to a more modest increase of 13.0%. with a unified government. This divergence is even greater depending on the party: Democratic presidents have achieved gains of 18.8% with a divided Congress, compared to 12.0% for their Republican counterparts.
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