In markets, the Trump Trade is on. It is just a little lost and very messy.
For months, the chance of Donald Trump finding his way back into the White House has been the biggest potential jolt to markets that no one wants to talk about. When asked about it, professional investors generally mumble something vague about taxes and spending. “Well the fiscal programmes are roughly the same as Joe Biden’s so we don’t see much impact either way and, you know, historically, elections don’t matter that much.” That’s the script.
This has always been odd. Politics wonks are convinced this is the most consequential and binary election of our time, and investors are saying it doesn’t really matter who wins.
Certainly, neither candidate is banging the drum for shrinking deficits. Still, investors’ fence-sitting, driven in part, I suspect, by a reluctance to upset the vengeful Republican candidate in case he does succeed, is now becoming harder — as Trump’s economic policy platform becomes clearer and traders and investors view the ghastly attempt on his life as a boost to his chances of electoral success.
The biggest point of consensus among investors is that Trump 2.0 is inflationary. A huge increase in trade tariffs, a volley of tax cuts for businesses and wealthy individuals, deregulation and a tough crackdown on immigration are a clear recipe for higher stocks, sure, but also for higher inflation, which is bad for bond prices.
Stocks are sticking to this script, continuing to motor higher despite all the usual worries about already lofty valuations. But the impact of the inflation story is much more tangled.
Take’ for example, market moves on Monday — the first trading day after the assassination attempt. Long-term bonds initially dipped in price, but the dip failed to stick. Quite the opposite, in fact. Ten- and two-year bond yields are sliding to their lowest point since March as prices and demand pick up.
This gets to the heart of the many contradictions of a potential second Trump presidency that make it so hard for investors to deal with. The inflation threat is real but it clashes with data showing that, for now, price rises are in retreat, and it clashes with the populist stance that Trump has fully baked in with his pick of JD Vance as his vice-presidential running mate.
The signal from that America-first selection is grim for Ukraine. Given Vance’s previous pronouncements on that conflict, it suggests support for its defence will wither away, and fast. It also suggests prolonged chest-beating in the direction of China, which Vance described in an interview on Monday as the world’s biggest threat to the US. It is little surprise, then, that investors should seek safety in the form of US government bonds —the go-to asset in times of geopolitical stress. Similarly, Vance has declared a fondness for a weak dollar but a fresh wave of inflation is, all things being equal, dollar-positive.
So, check mate. The Trump Trade becomes, as Rabobank put it in a recent note, the “Chump Trade”, consistently tripping up anyone seeking a nice clean narrative.
Two things, however, are clear. First, the impact of a second Trump presidency — which, we should remember, is still not a certainty — is likely to be starker in markets outside the US. For many global investors, China is already uninvestable, but it will stay that way potentially for years if a successful Trump and Vance stick to their line. And the global preference for US stocks over Europe is likely to extend, especially if Trump withdraws support both for Ukraine and for Nato.
Second, investors have to consider how they would respond if Trump crossed the reddest of red lines in markets and interfered with the independence of the Federal Reserve. “If he goes there, we will have uncertainty and a riot in markets,” said Michael Strobaek, chief investment officer at private bank Lombard Odier.
Institutional credibility is difficult to quantify and to price. It is, as Salman Ahmed, global head of macro at Fidelity International put it, “a state of mind”. But once it evaporates, “bond vigilantes wake up”.
How many slivers of a percentage point of bond yields is a Maga Fed worth? How would it balance out against a likely hunt for safety among nervy fund managers? Long term, these are more consequential questions than how much further US stocks can climb if Trump cuts corporate taxes.
Alarmingly, investors know they do not know the answers. Worse, they know there’s only one way to find out. Sitting on the fence until then might in fact be the best strategy.
