Biden vs. Trump redux

Roughly a half-year ahead of the US presidential election, there are hardly any doubts anymore: Joe Biden will face his predecessor Donald Trump if health problems for the former or incarceration of the latter don’t prevent this rematch from taking place. Six months are an eternity in (US) election years. A lot can (and will) happen between now and November 5. Nevertheless, we venture a look ahead at what’s arguably the most important event on the geopolitical calendar in 2024 and examine its potential implications for financial markets.

MAGA MAEG (Make America Even Greater)…

Americans will have a choice in November that they really don’t want because the majority of them oppose a reprise of the 2020 presidential election. Nevertheless, everything thus far has been building up to exactly this duel. In one corner is Donald Trump, who to this day still refuses to concede his defeat four years ago and is out for revenge. In the opposite corner is Joe Biden, who gets to face his preferred opponent and considers himself the only one who can beat Trump.

In the wake of the storming of the Capitol in January 2021, it seemed hardly conceivable that a Trump 2.0 presidency could be possible at all today, but Trump has astounded all of his critics once again with his comeback. His numerous court cases have thus far not harmed him politically and actually have been more of a help to him than not. With a favorability rating above 50%, Trump still enjoys overwhelming and steady support among Republicans. Two impeachments during his term in office, his denial of his election defeat in 2020, and his nationalist rhetoric haven’t changed that at all. Trump evidently is still the best horse in the Grand Old Party’s stable.

Our subjective analysis of a plethora of pundit commentaries indeed suggests that Trump has at least a 50:50 chance of winning the election. Polls are similarly even right now and give Trump a slight edge: he currently is performing better in surveys than he did during the 2016 and 2020 campaigns and was ahead at last look at both the national level and in the USA’s six to seven swing states (even though Biden has regained some ground lately). The former president had long also been ahead in the betting market, though his lead there has completely vanished in recent weeks.

In the election campaign weeks to come, Trump looks set to spend a lot of his time in court, but his lawyers’ legal defense strategy (i.e. first seek to stall the trials and then invoke immunity after the election) could prove successful. In any case, there seems to be very little likelihood that Trump will be sentenced to prison before the election. If he makes it back to the Oval Office, the motto then is bound to be “make America even greater.” The erratic behavior so typical of Trump would probably be daily fare also in his second term in office. However, this time his team would prepare the takeover of power much better than before. Trump will probably want to cross off the first items on his agenda on day one of his return to the White House.

A tight race | Election forecasts see red, but the betting market has swung back to blue

Sources: RealClearPolitics, Kaiser Partner Privatbank

…or WCFTJ (We Can Finish The Job)?

Roughly a half-year ahead of Election Day, President Biden’s chances of winning a second term in office seem moderate at best at first glance. The 81-year-old is by far the oldest presidential candidate in US history to ever run for reelection – question marks about his physical and mental fitness are hard to brush off and could raise doubts among Democratic voters. Outside-party and independent candidates could make life difficult for Biden and wrest pivotal votes away from him. Last but not least, the sitting president’s dismal poll numbers are also problematic – with a public approval rating of just 40%, Biden is less popular than any of his predecessors (since World War ll) were at this point in the election cycle. Many citizens are blaming the Democrats for the high cost of living, the rise in interest rates, and rampant illegal immigration. Meanwhile, the booming US economy and the recent further drop in the likelihood of a recession haven’t helped Biden thus far. One could think that the election saying “It’s the economy, stupid!” doesn’t apply any longer in 2024.

That is belied, though, by – among other things – the results of a January survey conducted by Pew Research, in which three-quarters of the respondents said that strengthening the economy was the top priority. The real problem for Biden is the USA’s high inflation, which has raised the general price level for goods and services by more than 15% thus far during his time in office, a bigger increase than any of his predecessors over the last 40 years presided over. Against this backdrop, it’s hardly surprising that Democrats at the moment are constantly pointing to the clear, though recently somewhat bumpy, disinflation trend of the last 18 months because they, too, are aware of the literature’s consensus that voters have short memories. According to that theory, what matters most is how good voters feel about their personal financial situation on Election Day (not six or twelve months beforehand). Since inflation looks set to tend to edge downward and real wages are likely to continue climbing up until the election, Biden can still get his hopes up that the state of the economy will argue in his favor after all in the end. However, what mustn’t arise in the months ahead is a recession. In the event of a sudden slump in economic activity, Trump would walk away with a victory in all probability because a recession in an election year historically has always seen the incumbent president get voted out of office.

Biden’s well-filled re-election campaign coffers could also be helpful to him in the home stretch. In the first quarter alone, he raised USD 165 million worth of campaign donations, much more than Trump raked in during the same period (USD 90 million). Moreover, Trump’s campaign funds are being spent on lawyers’ bills. Biden therefore has a much bigger budget that he can use, for example, to run expensive ads in swing states. Furthermore, the party of the incumbent president has often done better than predicted in past elections. So, true to Biden’s re-election slogan, in the end it may well turn out that the Democrats can “finish the job.” This, however, is predicated on them not just winning over centrists, but also being able to mobilize their core clientele (which includes Afro-Americans, labor union members, and young voters).

Little approval | Biden is not benefiting from robust economic activity

Public approval of US presidents’ policies

Sources: RealClearPolitics, Kaiser Partner Privatbank

What would a Trump 2.0 presidency mean?

How would policies in the USA change under Trump? This depends in large part on whether the Republicans also gain the upper hand in both chambers of the US Congress. But even if they succeed in doing so, Trump will not be able to achieve everything on his agenda. He might already exhaust a lot of political capital in his first few months in office. Trump then is bound to face growing opposition from the federal bureaucracy, public opinion, the media, the Supreme Court, moderate Republicans, and the financial markets. Shortly afterwards, midterm elections will be on the docket again.

The details of the Republican agenda may shift depending on the global context and Trump’s whims, but the following changes to the status quo are relatively likely in the areas listed below:

• Higher import tariffs: Trump has raised the prospect of a general 10% tariff on imports. He is even threatening to impose tariffs of up to 60% on imports from China and to revoke that country’s most-favored-nation status. If American protectionism gets shifted another gear higher in this manner, retaliatory actions by US trading partners would be very probable and global trade would suffer another shock. Tit-for-tat bickering would have an inflationary impact in any event.
• Limits on immigration: The USA’s porous southern border is a vital issue for many voters, and Trump is likely to address it swiftly. He might declare a national emergency, is likely to reinforce border security, and will probably spearhead actions to reduce both illegal and legal immigration. In the longer term, less immigration would significantly lower workforce growth, which would also tend to have an inflationary impact.
• Tax cuts: Trump would like to make the tax cuts that he enacted in 2017 (and which expire in 2025) permanent and is eyeing further tax reductions. This would give economic activity another boost in the short term, but would cause the already deep-red federal budget deficit to grow even larger in the longer run.
• Interference in monetary policy: Trump has criticized the interest-rate hikes by the US Federal Reserve, has spoken out against Fed Chairman Jerome Powell, and intends not to extend his term in office in 2026. Although a US president cannot fire a Fed chair “at will” and can only do so “for cause,” in a dispute over appointment powers, courts might cave to Trump in the end. Although moderate Republican senators would probably reject an unorthodox Fed chairperson, they might indeed confirm a monetary policy dove. The central bank’s independence would at least be tarnished.

And what would it not mean?

What won’t happen under a reelected Trump administration is just as interesting a question as what will transpire because a lot of what is feared by many people, is being overblown by many a media outlet, or perhaps is even hoped for by some is at least very unlikely to occur:

• The United States will not become a dictatorship: Trump will hold a lot of power at least at the start of his term in office, which could erode the customary checks and balances. However, midterm elections, in which the governing party has almost always lost influence in Congress in the past, will be just around the corner in 2026. Trump redux would then be over on January 20, 2029, at the latest. The three-fourths of the states needed to amend the US Constitution to extend presidential term limits would never ratify that. A lot of things can happen in four years, but an autocratically governed USA under the ironclad rule of Trump isn’t one of them.

• No withdrawal from NATO: Trump obviously is not a fan of NATO. During his term in office, he repeatedly threatened to leave the alliance. Under a Trump 2.0 administration, the tone and methods might become even more antagonistic, but Trump’s aim would remain the same as before: he wants the Europeans to increase their defense spending to 2% of GDP as quickly as possible. Trump should be taken seriously, but not necessarily at his word – a lot is simply Trumpian “deal-making tactics.” In any case, a US exit from NATO would only be possible with the consent of the Senate (which it is very unlikely to grant). Besides, even Trump knows that the US public continues to highly esteem and endorse the defence alliance.

• The federal budget deficit won’t shrink: Projections by the Congressional Budget Office are pointing distinctly upward for both the federal budget deficit and the federal debt load, but neither the Republicans nor the Democrats are likely to put forth genuine spending reforms. If a Trump administration does lower spending, the reductions are likely to be immediately offset by tax cuts. There is a scant prospect of a noteworthy consolidation of the federal budget – it’s more probable that the deficit will explode.

• Subsidies won’t be canceled: Trump and Biden both advocate for reviving US industrial policy. There is bipartisan unity on this issue, which makes corresponding legislation possible. Although Trump might cut “green” subsidies, the trend toward greater government support for US industrial production and the building of necessary infrastructure is likely to remain in place.

• Bureaucracy won’t be trimmed: Trump claims that he will “drain the swamp” and restructure the federal bureaucracy, downsizing the apparatus of government and breaking entrenched bureaucratic resistance to Republican policies. However, bureaucracy is more tenacious than one desires at times, and courts will intervene to prevent a comprehensive “purge.” Trump’s original intention will probably end up amounting at most to a minor administrative reform.

Interim conclusion: Even in the event of a Trump 2.0 presidency, the USA will continue to lead the world democratically and geopolitically. However, a second Trump administration would be accompanied by further rising deficits, a widening wealth gap, an increased labor shortage, higher import prices, and a looming hollowing out of the apparatus of government. All of the above would tend to have an inflationary impact in the long run. Meanwhile, a lot of continuity can be expected with regard to foreign-policy adversaries such as Russia and China and geopolitical hot spots like the Middle East. In this sense, Trump, too, is unlikely to abandon Ukraine despite his threats to the contrary. However, Trump will probably stick to his transactional and aggressive rhetorical ways, so permanent headline risk would be assured.

Or BBB (Build Back Better) after all?

So much for Donald J. Trump. But what would happen if Joe Biden gets reelected? It would mainly mean more of the same. Government spending, for example, would likely remain high. Unlike Trump, though, Biden plans to raise taxes on corporations and the rich, which should at least mute the expected increase in public debt. However, as recent years have shown, Biden is not the anti-Trump. Higher import tariffs are not taboo to him either – on the campaign trail in April, he called for a tripling of tariffs on steel and aluminum from China. But the Democrats will probably continue to focus more of their efforts in the future on creating additional incentives to reshore and build out manufacturing capacity in the USA. Empowering workers (mainly through labor unions), boosting social spending (mainly for early childhood education), and tightening antitrust policies are other components of Biden’s Build Back Better Plan, which has only partially been put into effect thus far. However, the only way this ambitious agenda can be implemented is if the Democrats win a majority in both chambers of Congress, which at least seems quite unlikely to happen as things currently stand. If the Democrats don’t gain control of Congress, Biden will probably concentrate on defending his achievements thus far under Bidenomics, particularly the massive public investments in infrastructure (Infrastructure and Jobs Act), semiconductors (CHIPS and Science Act), and green technologies (Inflation Reduction Act). In the case of geopolitical challenges, Biden – in contrast to Trump – will probably continue to seek consensus with US allies and is likely to strike a comparatively softer tone.

Panic over Trump: Sooner, later, or not at all?

Media reporting on the upcoming election looks destined to grow louder and louder in the weeks ahead. In the face of an ever more heatedly pitched duel between two old men, it becomes all the more important for investors to keep their cool and to look away once in a while. The remaining months until the election are bound to be unusually distracting. We would like to remind readers here that investment strategy and portfolio construction should be an apolitical matter.

Nevertheless, it’s justified to wonder how markets might behave before and after the election and whether there is a Trump risk. With regard to the equity market, statistics on the four-year presidential cycle provide at least a reference point. To wit, the equity market normally rises in an election year to the same extent on average as it does in any other year. However, the devil is in the details. In election years in which the incumbent president was not reelected, the equity market was more volatile than average in the spring and summer. Given the neck-and-neck race at the moment, mounting uncertainty about an upcoming change of leadership in the White House could cause 2024 to become similarly volatile.

If Trump becomes the frontrunner… | …the equity market could come under pressure

Average performance of the S&P 500 index in election years

Sources: Bloomberg, Kaiser Partner Privatbank

After the election, there will then be a blue (Biden) scenario and a red one (Trump). In the event of a Biden victory, theoretically there would be no cause for major market reactions because the man is known and would stay the current foreign-policy and fiscal course. If, instead, the red scenario (a Trump victory) comes to pass, the bond market might proverbially “see red” and could suffer a temporary selloff particularly if the Republicans manage to paint Congress completely red, the prospect of further tax cuts without spending or revenue offsets looms, and the federal budget deficit threatens to definitively spiral out of control. If the panic on markets is then febrile enough, that would possibly discipline even a man like Trump and could cause him to come to his senses with regard to budget policy.

Trump in the White House and a renewed deadlock in Congress would possibly be the variant most welcomed by financial markets. Panics over Trump, even if perhaps only lasting for a few hours, could nevertheless ensue during a second term in office thanks to his legendary hyperactive social media messaging. In that case, investors should draw a lesson from the 2016–2020 period. A volatile news flow and intermittent volatility on the markets at that time ultimately did not bring about any noteworthy macroeconomic changes. Many an investor may find it hard again in the future to stay objective and calm in the middle of an X storm (a.k.a. Twitter storm) by Trump, but it would be advisable to do so. Investors should batten down the hatches and wait until the storm is over. Every single time.