Rising expectations that former President Donald Trump will regain the White House in November are supercharging the so-called Trump trade, on views that his policies will lift corporate profits even while spurring worries about the country’s long-term fiscal health.
The two sides of the trade have been evident in recent weeks, as investors price in greater odds of a win by the Republican challenger following a disastrous performance by President Joe Biden in a late June debate and after last weekend’s assassination attempt on Trump.
Stock investors are leaning into corners of the USA equity market that could benefit from proposed Trump policies such as tax cuts and regulatory easing, including small caps and energy shares. Those preferences — along with expectations that the Federal Reserve will cut interest rates in coming months — are fueling a rotation out of big technology stocks and into less-loved areas of the market.
Treasury markets tell a different side of the story, with some investors lightening positions in longer-dated bonds as they fret about the fiscal consequences of lower tax revenues and more budget spending. UK merchant banking firm Close Brothers estimated that a second Trump term could usher in from $4 trillion to $5 trillion of extra government borrowing over 10 years, potentially boosting inflation and weighing on bond prices.
Many investors believe monetary policy and corporate profits will ultimately overshadow politics as long-term drivers for asset prices, while much could change in the less than four months until election day. Nevertheless, the recent moves give a glimpse into how markets are approaching the possibility of a second Trump term. “The market is saying that the expectation is that there is going to be a second Trump presidency,” said JJ Kinahan, CEO of IG North America and president of online broker tastytrade. “The probabilities are all pointing that way.”
Online prediction site PredictIt showed bets of an election win at 69 cents for Trump, compared with 53 cents a month ago. Biden stood at 28 cents, compared with 44 cents in mid-June. Another poll found Trump opening a marginal lead among registered voters — 43% to 41% — over Biden.
The rising odds have been accompanied by a rally in everything from small caps to shares of crypto companies. Beneficiaries include private prison operator Geo Group, whose shares have risen 33% since the debate in late June. Trump promised to crack down on illegal immigration, which could boost demand for detention centres. Bitcoin miner Riot Platforms is up 30% this week, mirroring a rally in the price of bitcoin following the assassination attempt on Trump, who has slammed Democrats’ attempts to regulate the crypto sector.
The small-cap-focused Russell 2000 index is up 11% since the debate, as expectations that Trump will keep taxes low and bets that the Fed will cut interest rates in September boost the appeal of smaller companies. The S&P 500, by contrast, is up just 3.4% in that period.
“The Trump trade … revolves around the prospect of faster economic growth that favours domestic companies,” said Brian Jacobsen, chief economist at Annex Wealth Management. King Lip, chief strategist at BakerAvenue Wealth Management, said his firm has been holding a limited position in small-cap stocks as a hedge for a Trump victory.
Robert Christian, chief investment officer at K2 Advisors, which invests in hedge funds, said many hedge funds have positioned themselves for a Trump win with increased exposure to energy companies and financials, which they believe could benefit from a looser regulatory environment. Some stocks have suffered as Trump’s perceived chances have grown. Among them have been shares of European carmakers, which could be hard-hit by potential tariffs on foreign imports.
