The 2024 US presidential election is upon us, and while the polls are too close to call, financial and betting markets are pricing in a Trump victory. Additionally, the prospect of Republican control of both houses is also being factored in which could mean Trump would be able to push through some of his most ambitious policies. However, Wall Street’s confidence may be misplaced and there is potential for a strong reversal in Trump bets if Harris takes a surprise victory. ABSI this week will analyse the US election ahead.
The US heads to the voting booths today to elect the 47th President. In what has been an extremely tight race, Trump has started to edge his nose ahead as we approach the finishing post. This has been evident in some polls, all betting markets, and it is increasingly becoming evident in financial markets with appreciation in assets linked to Trump policies.
So what does a Trump presidency mean for the US and global economy?
Source: The Economist
It depends on if Republicans sweep both houses of congress which will allow smoother passage of legislation. At this stage the probabilities favour this outcome, though this will change erratically over the next 24 hours as results start to funnel through.
The biggest beneficiary of this outcome will be stocks as Trump looks to deregulate, provide tax cuts, and impose tariffs on imports. This is particularly good news for American domestic manufacturing and energy. Republicans are pro fossil fuels, so it's likely we’ll see an expansion in oil and gas drilling but a rollback in support for renewable energy.
Bond yields are another asset class heavily pricing in a Trump landslide given the fact that despite the Fed cutting interest rates by 50 bps in the previous FOMC meeting, bond yields have increased over 50 bps reflecting the inflationary effects of Trump’s policies. Despite Republicans being traditionally financially conservative, this is not the case for President Trump who has announced a raft of policies and tax cuts that could blow out the budget deficit to US$7.5 trillion according to some estimates. If this is the case, the Fed will have no choice but to reverse recent interest rate cuts and retighten monetary policy.
Source: World Government Bonds
Given the market’s anticipation for a reacceleration of inflation, it is unsurprising that gold and Bitcoin have been rallying strongly. Gold has been having one of its strongest years on record for many reasons but the recent price action to new record highs is related, in part, to the higher probability of the “red wave” bringing about higher inflation. Bitcoin falls into the same basket but has been boosted by Trump’s pro-crypto pledge to voters and his desire for Bitcoin to be owned by the Federal Reserve in a similar fashion to gold. If this were to eventuate, the price of Bitcoin would most certainly go north of US$100k.
It is important to appreciate the fallibility of polls and betting markets and the election result is not a foregone conclusion. If you recall, in the US midterms in 2022 there was meant to be an overwhelming red wave which never eventuated with Democrats walking away with a net gain of two seats in the gubernatorial elections and expanding majority in the Senate. Likewise, it is important to consider the groups each candidate has been courting. While Harris is appealing to older cohorts of females, who have a track record of turning up and voting, Trump has been embracing support from younger male voters who are known to hold a low propensity to make the effort to vote on election day.
Given where markets currently sit, as an investor, I would be assessing hedges against the current consensus. Shorting Bitcoin, the stock market, and going long bonds are ways in which an investor can capitalise on the potential mispricing of an overwhelming Trump victory currently held as consensus by financial markets. In this environment, gold appears to be one of the few asset classes to be agnostic to the election outcome and to benefit from a tight contest that could take longer than expected for a winner to be announced.
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