Rising expectations that former President Donald Trump will regain the White House in November are supercharging the so-called Trump trade, on views that his policies will lift corporate profits even while spurring worries about the country’s long-term fiscal health.
The two sides of the trade have been evident in recent weeks, as investors price in greater odds of a win by the Republican challenger following a disastrous performance by President Joe Biden in a late June debate and after last weekend’s assassination attempt on Trump.
Stock investors are leaning into corners of the U.S. equity market that could benefit from proposed Trump policies such as tax cuts and regulatory easing, including small caps and energy shares. Those preferences – along with expectations that the Federal Reserve will cut interest rates in coming months – are fueling a rotation out of big technology stocks and into less-loved areas of the market.
Treasury markets tell a different side of the story, with some investors lightening positions in longer-dated bonds as they fret about the fiscal consequences of lower tax revenues and more budget spending.
UK merchant banking firm Close Brothers estimated that a second Trump term could usher in from $4 trillion to $5 trillion of extra government borrowing over 10 years, potentially boosting inflation and weighing on bond prices.
Many investors believe monetary policy and corporate profits will ultimately overshadow politics as long-term drivers for asset prices, while much could change in the less than four months until election day. Nevertheless, the recent moves give a glimpse into how markets are approaching the possibility of a second Trump term.
“The market is saying that the expectation is that there is going to be a second Trump presidency,” said JJ Kinahan, CEO of IG North America and president of online broker tastytrade. “The probabilities are all pointing that way.”