After President Joe Biden’s struggles in the first presidential debate, the chances of a second presidency for Donald Trump are increasing. Investors are taking note.
Even before the debate, Trump was ahead of Biden in the polls and betting markets.
According to a recent note from Capital Economics, a Trump 2. 0 presidency would likely have a significant impact on the main macroeconomic issues that investors are most concerned about: inflation, interest rates, and the U. S. dollar.
Most likely, all three would intensify if Trump were elected 47th president of the United States, which would ultimately constitute a drag on stock prices.
“We don’t think Trump has much room to repeat the fiscal expansion and tax cuts that boosted stocks in his first term; rather, we believe that the maximum policy that would likely move markets this time would be to escalate the industrial war. “and potentially impose universal price lists on U. S. imports,” said James Reilly, market economist at Capital Economics.
For his part, Trump said last month that he would impose exorbitant price lists of 60% on Chinese goods if he were re-elected. This would be much more than the price lists set by Trump in 2018, and it would not only disrupt global trade. , but it would most likely undo much of the progress the Fed has made in fighting inflation.
“Their tariff proposals would likely cause a spike in inflation, which could convince the FOMC to raise interest rates,” Reilly said. “So while the source of the inflationary impulse would be another (tariffs rather than considerations of expansionary fiscal policy), a Trump victory would send Treasury yields back up. “
In addition, Reilly said that Trump’s potential price lists would account for up to 1. 5% of U. S. GDP and hurt corporate profits.
And this, combined with the fact that there would likely be little appetite in Congress for Trump to enact fiscal expansion systems as he did in his first presidential term, would push the U. S. dollar higher, which would constitute a drag on stock prices as it would make exports more expensive.
“A Trump victory could simply lead to the dollar remaining more potent for longer, or emerging particularly from here on out, if his tariff policies prompt the FOMC to return to tighter policy and/or cause a broader industrial war that would undermine global expansion. and bring safety to life. A safe haven for the dollar,” Reilly said.
Despite the potential headwinds to inventory costs under a Trump 2. 0 presidency, Capital Economics believes the stock market would perform very well, even incredibly well, as an over-the-top AI bubble would offset all those macroeconomic concerns.
“Our positive projections for the stock market in 2024 and 2025 are based on the idea that the hype around AI will continue to fuel a bubble in the stock market. We don’t think the increase in risk-free reduction rates or the impact on GDP will be big enough to burst this bubble,” Reilly said.
“We would be susceptible to lowering our forecast for the S to 6,500 only slightly
This story was originally published in February 2024 and has been updated.
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