2024 elections: a tale of the unexpected?

We have already seen a deluge of elections this year. Unforeseen results in South Africa, Mexico and India have led to heightened volatility. The UK general election is imminent, and France has shocked financial markets with snap elections to be held in early July. A victory for the far right here could threaten the EU. But the big one is on November 5, when it looks like Joe Biden and Donald Trump will face each other in a rematch of the 2020 contest. As the world’s largest economy, what happens in the US has global implications. Let’s consider what a victory for either candidate might mean.

The common assumption is that the re-election of Donald Trump could re-ignite inflation. Trump is expected to slash corporate and personal taxes, as he focuses on growth, to “Make America Great Again”. This will likely increase government borrowing, further adding to the already ballooning fiscal deficit. During his presidency, Trump’s protectionist stance led to increased trade tariffs. These actions are set to continue if he wins in November, raising input costs throughout the economy. The Republican candidate also continues to talk tough on immigration. Any further clampdowns here could shrink the pool of cheap labour in the US, further adding to inflationary pressures.

None of this bodes well for the bond markets. Inflationary pressures mean the US Federal Reserve (Fed) will need to keep rates higher for even longer. Current Fed chair Jay Powell’s term in office expires in 2026. As president, Trump would influence the new appointment, potentially resulting in a more dovish chair, with a less tough approach to the 2% inflation target. In contrast, a victory for the Democrats could mean higher taxes to offset increased government spending. Hardly surprising that veteran bond investor Bill Gross has gone on record saying that a Biden victory would be better for bond markets than a Trump one.

Equities, in contrast, would likely welcome another Trump presidency. Lower corporate taxes, less stringent regulation and a weakening of Biden’s environmental and climate agenda should provide fertile conditions for corporate profits. In recent weeks, Trump has been courting US oil and gas barons. And an increasing number of Wall Street and tech billionaires are openly backing the former president. A Trump victory could also have implications for sector performance. As an example, it might favour producers of ‘dirty’ energy at the expense of companies that have benefitted from Biden’s focus on renewable energy sources.

The outlook for the US dollar is potentially of greater importance globally. A stronger economy and higher for longer rates, as a result of a Trump victory, could be supportive of the dollar. However, fearful of the impact on US exports, the ex-president might try to intervene to keep the dollar from strengthening too far. And further afield, a stronger dollar and higher US bond yields would raise borrowing costs for the emerging markets that rely heavily on dollar bond market funding. The outcome of the election is unpredictable at this stage, but a Biden victory would mean a continuation of the status quo, while uncertainty and volatility are likely to rise if Trump is
re-elected.