By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Donald Trump last week became the first former president to be convicted of a crime, but Wall Street believes he still has a solid chance of winning the November election and is examining how a second term for the Republican candidate could influence the markets.
Investors said a Trump victory could broadly boost the stock market and boost the dollar. But his proposed tariffs and expanded tax cuts could also fuel inflation and hurt U.S. Treasury bonds, they said.
Market participants said it is too early to gauge how Trump’s election prospects will be affected by his conviction for falsifying documents to cover up a payment to silence a porn star. The verdict, which Trump said he will appeal, will not prevent the former president from campaigning or taking office if he wins the election.
Recent polls showed U.S. President Joe Biden, a Democrat, and Trump nearly tied in the presidential race, which some say could be influenced as much by macroeconomic as political factors.
The options market continues to price a rise in volatility around the election, indicating that investors are bracing for political uncertainty.
Here’s a first look at how investors think Trump 2.0 could impact stocks, bonds and currencies.
SHARES
The S&P 500 rose 68% during Trump’s first term, which was marked by tax cuts and infrastructure spending, as well as a trade war with China and the onset of the COVID-19 pandemic. The benchmark index is up 38% so far under Biden.
An analysis from LPL Financial on Friday showed that the S&P 500, which is up about 9% this year, has risen in line with Trump’s election chances, as measured by betting site Predictit. At the same time, Biden’s election chances have been negatively correlated with the S&P 500 since February, the survey found.
Some investors believe a second Trump term could be good for stocks, especially if Trump can avert Biden’s promised tax hikes. Much would depend on the composition of Congress.
“In a Trump administration with a divided Congress or a Republican clean sweep, we can say that a corporate tax increase is off the table,” said Sonu Varghese, global macro strategist at Carson Group.
A second Trump White House would also seek to reduce the power of US financial regulators, according to a Reuters report. That could again be positive for stocks, especially small companies, which may find it more expensive to meet regulatory requirements, wrote Stephen Auth, chief investment officer equities at Federated Hermes.
Trump’s pledge to support fossil fuel production and a relatively more business-friendly approach to environmental regulation could also boost sentiment in the energy sector, according to a report from Nomura.
However, tariffs and trade wars are potential spoilers.
Trump has floated the idea of tariffs of 60% or higher on all Chinese goods and 10% across-the-board tariffs on goods from all points of origin in an effort to erase the U.S. trade deficit.
Deutsche Bank analysts said trade protectionism could act as a “negative supply shock,” raising revenues at the cost of weaker growth and higher inflation.
Multinational companies that generate revenue from China or have deep links in the supply chain there could also be vulnerable, Carson’s Varghese said.
Trump’s national press secretary, Karoline Leavitt, said in a statement that his “pro-growth, anti-inflation economic policies will quickly lower prices, lower interest rates and reduce long-term debt, which will benefit all Americans, including investors.”
Meanwhile, at least one stock appeared to have an immediate reaction to Trump’s conviction: Shares of Trump Media & Technology Group, majority owned by Trump, fell 5% on Friday.
BONDS AND PRIZES
Both Republicans and Democrats have pledged to reduce deficits and debt. But Trump’s policies, such as expanded tax cuts, could add to the yawning U.S. budget deficit and drive up inflation, investors said.
That, in turn, could hurt demand for U.S. Treasury bonds, putting pressure on bond prices and driving interest rates higher.
Trump’s tax proposals “would be a big hit to revenues, and I don’t think the bond market would respond well to that,” said John Velis, FX and Americas macro strategist at BNY Mellon.
Inflation and fiscal expansion could cause the Fed to raise rates, another path to higher rates, Nomura analysts said.
Trump’s tariff policies could also hurt demand for U.S. debt among foreign investors, said Christopher Hodge, chief U.S. economist at Natixis. Foreign holdings of U.S. Treasury bonds rose to a record high of $8.09 trillion in March, rising for the sixth straight month, Treasury Department data showed earlier this month.
CURRENCIES
The dollar fell about 10% against a basket of currencies during Trump’s first term. But Trump’s presidency also saw a two-year period in which the dollar rose about 15%, boosted in part by demand for safe havens in the face of trade policy concerns.
Politico reported in April that economic advisers close to Trump were debating ways to devalue the U.S. currency, a move that could boost U.S. exports but also trigger an inflation recovery and undermine the dollar’s position as the world’s dominant currency would endanger.
However, some investors believe the dollar could find support if Trump’s policies lead to higher US interest rates and stronger growth.
“Amid increased U.S. interest rates and tariffs, a Trump presidency could very well keep the dollar stronger for longer,” said Jonathan Petersen, senior market economist at Capital Economics.
Higher trade rates could also mean volatility for currencies like the Mexican peso and the Chinese yuan, which saw big swings during Trump’s first term, Petersen said. Smaller European currencies, including the Swedish krona and Polish zloty, could also be affected as they are particularly sensitive to risk sentiment and are likely to be affected by potential rates, he said.
(Reporting by Saqib Iqbal Ahmed; additional reporting by Davide Barbuscia and Lewis Krauskopf; Editing by Ira Iosebashvili)
