The only real test of how the market might react to the US election outcome came over the summer when polls spiked in Trump’s favour in the wake of his assassination attempt in mid-July and his defiant fist-raising moment. The chart above looks at how both Ford and GM (indexed to 100 as of the first of May) surged as Trump’s odds of winning did likewise and then also dropped when Biden bowed out. The chart point at 1 was the day after June 28, when the Trump-Biden debate ended in a disaster for Biden. Chart point 2 is the first market day after the Trump assassination attempt of July 12. Chart point 3 is the day after the July 21 Biden announcement that he was quitting the race.
Ford seemed more sensitive than GM to the swings in Trump’s polling, perhaps as the latter produces almost twice as many cars in Mexico than Ford, with Trump tariffs a risk for the profitability of Mexican production. Still, GM sells over 80% of its cars in the US, while Ford sells about two-thirds there. Then again, earnings were also reported in late July and a very weak earnings report drove Ford’s huge drop in price. Regardless, these two companies’ stock prices will be sensitive to the election outcome.
Side note while talking US carmakers: as we looked at last week, Tesla is an incredibly tricky case study over this election. Less than half of its revenues are from the US market and CEO Elon Musk has become an ever-louder Trump supporter of late, even appearing at a rally with him at the weekend. Trump tariffs and the risk that owning a Tesla is seen as supporting Trump are a risk for the company.
Trump 2.0: Let’s start with the positives.
Most of the anticipation for a positive reaction in the event of Trump 2.0 are based on the 2016 playbook, when the market anticipated and then got big tax cuts, especially for companies. Assuming some echo of the Trump 1.0 playbook, the sectors that will likely celebrate a Republican sweep scenario:
US manufacturers with a large domestic market presence and foreign competition could do especially well in the event of a Trump win as Trump’s new tariffs would make them more competitive domestically. Do remember that supply chains are often global, however. Domestic construction for adding manufacturing capacity would likely also do well.
Big banks and fossil fuel energy companies. Besides bringing tariffs, Trump has also promised deregulation for traditional energy companies and banks/financial services companies. For banking giants in particular, the hope is that a Trump 2.0 would see the unwinding of some of the strict Dodd-Frank regulations introduced after the financial crisis in 2007-09. Like Ford and GM, banks also surged on the higher odds of a Trump win in mid-July.
Stocks in general. Trump has promised to cut corporate taxes further to 15% from the current 21%, an immediate boost to the bottom line for all companies that are profitable.
European defence companies. A Trump 2.0 administration will likely see a further weakening in confidence in the US-Europe security alliances and greater US willingness to negotiate with Russia to end the war in Ukraine. This would likely inspire massive further outlays in Europe to boost woefully inadequate European defence capabilities.
But what are the risks?
The Danish physicist once said “prediction is very difficult, especially about the future”. Predicting how a Trump 2.0 scenario would play out in the longer term is devilishly difficult, but let’s bring up some areas of concern that could quickly cap any positive market response.
Trade war risk. This was quite prominent during Trump 1.0, when the market would often swing on Trump’s latest tweet about measures against China. But Trump may go bigger and broader this time with tariffs, touching off the risk of a showdown not just with China, but with other large trading partners, from Mexico and Japan to Europe.
Strong US dollar. It is widely agreed that tariffs and stimulating tax cuts would drive a stronger US dollar. The US dollar is the global currency, and its strengthening is a risk for global growth and particularly emerging markets.
Inflation risks. US deficits are already massive for an economy that is not in recession. Further Trump tax cuts and tariffs could risk spiking prices further. Market sentiment could quickly sour if the Fed is seen having to keep interest rates at high levels.
Unsteady US debt and high US treasury yields. In reaction to the Trump win in 2016 the stock market could rally even as interest rates rose sharply because they were rising from such a low base. Trump's policies are seen as inflationary and longer yields could rise sharply again. Now, not only are rates much higher, but the US debt load is on a completely unsustainable trajectory at current interest rates even without new Trump tax cuts. What would the US Treasury and the Fed have to engineer new ways to prevent interest rates from spiralling higher? No easy answers here.
Civic unrest. The very most difficult area to predict, but if Trump follows through on threats to deport illegal immigrants, this could prove very disruptive.
How a Trump 2.0 scenario will play out is unknowable but of all the scenarios, will likely bring the largest market swings in the immediate wake of the election as markets race to anticipate what new policy an activist president and Congress will bring. And it will be extremely important in the case of a Trump 2.0 outcome to watch for what materialises after a possible knee-jerk rally. The most positive scenario for markets for the medium term, on the other hand, is likely not Trump 2.0, but a Harris win with a Republican Senate – essentially the status quo. The market often likes it best when politicians can’t do much.
See you next week!
About the author: John is Saxo’s Chief Macro Strategist, with over twenty-five years’ experience in the financial markets, chiefly as Saxo’s former Head of FX Strategy. He is also an American, having grown up in Houston, TX and has a long-standing passion for following the course of US elections and their place in history since being allowed to stay up late as a young kid to watch the 1980 election results roll in and Ronald Reagan winning the presidency over Jimmy Carter.
