Source: Cycle Capital Research
1. Overview of the Election
On June 28th, the first debate for the 2024 presidential election was held between Joe Biden and Donald Trump. Trump performed significantly better and raised concerns among the public about Biden’s ability to handle the presidency due to his advanced age. After the debate, Trump’s approval ratings surged. Additionally, Trump has a significant advantage in the swing states, leading in all seven major swing states (North Carolina, Arizona, Georgia, Nevada, Wisconsin, Michigan, and Pennsylvania).
Source: https://www.realclearpolling.com/polls/president/general/2024/trump-vs-biden
There are three key moments in the upcoming election:
1) National Party Conventions: The Republican National Convention will take place from July 15th to 18th, 2024, and the Democratic National Convention will take place from August 19th to 22nd, 2024. During these conventions, the presidential and vice-presidential candidates for each party will be selected.
2) Second Round of Candidate Debates: September 10th, 2024.
3) Election Day: November 5th, 2024.
2. Major Policy Differences
Trump and Biden share relatively consistent views on infrastructure, trade, foreign policy, expanding investment spending, and encouraging manufacturing reshoring. However, they have significant policy differences in areas such as taxation, immigration, and the new energy industry.
1) Taxation
Trump advocates for reducing the corporate income tax rate from 21% to 15% and does not support significant increases in government spending. On the other hand, Biden’s “Balancing Act” proposes increasing tax rates for corporations and the wealthy, raising the corporate tax rate to 28%, while continuing to provide student loan relief. Trump’s previous tax cuts during his term boosted stock market profits and encouraged the inflow of foreign capital. The proposed tax cuts in this election are weaker than before (the previous tax reform reduced the rate from 35% to 21%), resulting in a relatively weaker boost. According to China International Capital Corporation’s analysis, the net profit growth rate of the S&P 500 index in 2025 could increase by 3.4 percentage points to 17%, compared to the market’s consensus expectation of 13.7%.
2) Immigration
Since Biden’s inauguration in 2021, there has been a significant increase in illegal immigration to the United States. In contrast to Biden’s moderate immigration policies, Trump advocates for tighter immigration policies, but with relatively relaxed requirements for “high-level” talent. The tightening of immigration policies may weaken the momentum of US economic growth and accelerate wage growth.
3) Industrial Policies
Trump and Biden have significant differences in the energy sector and other areas. Trump advocates for a return to traditional energy sources, expediting permits for oil and gas exploration, and increasing development in traditional fossil fuel energy to ensure cost leadership in energy and power for the United States. He may also cancel green subsidies for new energy vehicles and batteries. On the other hand, Biden supports the continued development of clean energy.
4) Trade Policies
Both Biden and Trump have implemented high tariffs, which may increase the cost of imported raw materials and hinder downward pressure on the Consumer Price Index (CPI). Compared to Biden’s policy, Trump’s policies are more aggressive. Biden announced in May that additional tariffs would be imposed on Chinese imports, but the scope only covers goods worth $18 billion, and some tariffs will not be implemented until 2026. Trump, on the other hand, proposed imposing a 10% baseline tariff on imported goods entering the United States, as well as an additional 60% or higher tariff on Chinese goods. He may also impose “specific tariffs” on certain regions or industries.
From the chart above, it is clear that Trump’s green arrows are more prominent. His tariff policy, tax cuts, and immigration policy are not conducive to a decline in inflation.
3. General Characteristics of Asset Prices in Election Years
Looking at the entire year, there is no significant difference in the overall performance of the market and the changes in the federal funds rate compared to other years during the election year.
When considering quarters and months, during the early stages of the election (mainly referring to the third quarter of the election year), the changes in the federal funds rate are significantly smaller than in other quarters, while asset prices show higher volatility during this period. The reason behind this may be that monetary policy tends to remain unchanged as the election approaches to avoid any suspicion, while asset prices fluctuate due to the uncertainty of the election results. In contrast to the strong seasonal patterns in October to December in non-election years, stock prices in October before the election tend to be weaker than in non-election years.
4. Review of Market Conditions After Trump’s Last Election
On November 9, 2016, the preliminary results of the US presidential election were announced, and Donald Trump, the Republican candidate, won the election and became the 45th President of the United States. Trump’s unexpected victory caused market volatility, with the market betting on the “Trump Trade.” From November to December 2016, there was a rise in US bond rates, a strong US dollar, and a strong US stock market. After the expectations were digested, the trading momentum decreased. The following are the price changes of various assets at that time (weekly charts).
US bond yields initially declined and then rebounded.
Gold initially fell and then rose.
S&P 500 increased.
NASDAQ increased.
BTC increased.
This round of “Trump Trade” started much earlier. After the first debate, the market’s expectations of Trump winning significantly increased, and the market began to position itself for the “Trump Trade” in advance. The 10-year US bond yields reached a high of around 4.5% on the second day of the debate.
Coupled with the additional votes that the shooting incident targeting Trump on July 14th may bring, the most likely outcome is that Trump will be elected president, and the Republican Party will control both houses of Congress. It can be foreseen that the shooting incident targeting Trump over the weekend will bring a rise in the US stock market on Monday.
5. Conclusion
Impact of the US election on the market:
1) The election itself cannot be a reason for bullish trading. The simplistic logic that the Democratic Party needs the US stock market to rise in order to win the election does not hold.
2) There is a potential downside risk in the market around October, due to increased volatility.
3) Trading the election results (Trump Trade) mainly involves being long on CPI, long on US bond rates (relative to market expectations of a downward trend, meaning resistance to downward movement rather than absolute upward movement), short on gold, long on US stocks but with less intensity compared to Trump’s previous election, and long on BTC (considering that BTC tends to follow the US stock market and lacks sustained divergence from it, and Trump is crypto-friendly).
