How markets might be wrong about Donald Trump

Whether anticipating higher growth and stock prices, or higher deficits and inflation, both sides could be wrong

Author of the article:

Financial Times

Robert Armstrong and Aiden Reiter

Published Nov 14, 2024  •  3 minute read

Former U.S. President and 2024 Republican presidential candidate Donald Trump, alongside Senator Marco Rubio of Florida, applauds during the third day of the 2024 Republican National Convention at the Fiserv Forum in Milwaukee, Wisconsin, on July 17, 2024. Photo by ANDREW CABALLERO-REYNOLDS/AFP via Getty Images

The consensus view of what Donald Trump means for markets is too easy, smells of political bias and reads too much into the recent rally. It may be right, but we should be alert to the possibility it isn’t.

The consensus is that Trump means higher growth, higher deficits, higher inflation, higher stock prices and higher bond yields. Natural Trump haters, like the 23 Nobel Laureates in economics who signed a letter endorsing Kamala Harris‘s policies over Trump’s, emphasize the deficit and inflation side. Trump lovers emphasize the growth side. Scott Bessent, angling for a big job in the administration, argued in The Wall Street Journal that the election market rally proved the growth interpretation correct — clearing the way for critics to use his own words to argue that the next big correction will be Trump’s fault, which it almost certainly won’t be. Both sides of the consensus could be wrong.

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Chris Verrone, a strategist at Strategas Research Partners LLC, argues that the “higher rates” bit of consensus has been overstated, and that the increase in yields we have seen in recent months can be attributed to better economic data lifting growth expectations. Cyclical stocks have done well, and the rise in yields tracks the Citi economic surprise index.

Matt Klein of The Overshoot subscription research service argues that policymakers may learn the wrong lessons from the presidential election. As a result, fiscal policy will be less accommodative in future downturns, increasing economic risks and making Treasuries a more appealing hedge. More hedging with Treasuries means lower yields, all else equal.

“Prior to the pandemic, a consensus had begun to develop that the U.S. and other major economies consistently left money on the table by failing to run macro policy hot enough, both in normal times and in response to downturns … The virus gave policymakers a chance to test these new ideas. I believe that the result was an astounding success. Employment recovered faster than in any prior downturn, while inflation-adjusted U.S. consumer spending per person grew faster in 2019Q4-2024Q3 than it did in 2015-2019 … The U.S. outperformed every other major economy relative to pre-pandemic expectations, likely because those societies did not match America’s macro policy stance.”

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This will not be the takeaway for politicians, however. We can debate how much of the post-pandemic inflation can be attributed to Biden’s fiscal policies; we can also debate whether or not people would have liked a bigger downturn with high unemployment any better than they liked inflation. But the electoral lesson that everyone seems to be taking away from last week is that inflation is a policy choice, and one that is electorally radioactive. But if fiscal policy is timid in downturns, the downturns will be worse, Klein argues. In that world, it will make more sense to own more bonds, which perform well when risk assets do not. Such a portfolio shift will not play out quickly, of course.

Joseph Wang of Monetary Macro LLC argues that Trump’s tariff policy could be bad for stocks. This argument is common enough, but is generally framed in terms of economic friction. Wang says it is more a matter of how corporate value added is shared between corporations and workers:

“The shocking annual US$1 trillion trade deficit in goods appears to suggest that foreign companies are completely dominating the trade with the U.S. But in fact much of the goods imported into the U.S. are sold by U.S. companies who decided to manufacture abroad … Trump’s efforts to encourage companies to make in America can be seen as a struggle for American companies to share more profits with American workers.”

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Reshoring, which tariffs hope to incentivize, means higher labour costs. If companies pass the higher costs on to consumers, the tariffs will be inflationary, too. But it doesn’t have to play out that way. If demand proves inelastic, the higher costs will have to come out of profits, so the effect will be redistribution rather than inflation. Wang notes that the first Trump administration caused little reshoring and a lot of rerouting of trade, but it may design smarter tariffs this time.

This column’s view is that because policy takes time to make, and because the market’s visibility on the effects of Trump policy is limited, it will take some time to see a true Trump effect in markets. Next year may simply see current trends continue. But 2026 is certain to be interesting.

© 2024 The Financial Times Ltd

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