Will Trump Pump the Stock Market?

U.S. stocks are expected to get a short-term boost in the aftermath of the attempted assassination of former President Donald Trump over the weekend, as analysts say the likelihood of his victory in November has increased.  Trump's lead has extended itself since Biden's poor debate performance two weeks ago which left his biggest supporters concerned about the president's ability to handle the rigors of another four years in office.

Will the stock market do better under Trump or Biden?

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Additional Resources
Victor Niederhoffer – Presidential Elections & The Stock Market
Trevor Jennewine: Article
Political Cycles & Industry Returns – Stangl & Jacobsen Paper
Hidden Forces - Henry Olsen Interview

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Transcript

The US presidential debate broadcast live two weeks ago was a sad and sorry display. The rules of the debate – put in place by CNN were designed to avoid the chaos of the prior debate which were marked by heckling, constant interruptions and character attacks.

The new 90-minute format with no opening statements, timed responses, muted microphones between turns, and the absence of a live audience—were supposed to keep the exchange between candidates under control and policy-focused. [Golf Clip] That didn’t really work out…

CNN said that the moderators would “use all tools at their disposal to enforce timing and ensure a civilized discussion.”

According to The New York Post, this new format was expected to favor Biden, but his performance instead left his biggest supporters concerned about his ability to handle the rigors of another four years in office. 

Debates can (of course) swing elections, and this one — like Richard Nixon’s sweaty debate against JFK in 1960 — might go down in history as the moment Biden supporters lost all hope.

In the lead up to the presidential debate, senior Democrats had been pushing Biden to get out in front of the press more and put himself in unscripted situations to show what he can do.

According to AP news Biden’s halting delivery and meandering comments, particularly early in the debate, fueled concerns from even members of his own party that at age 81 he’s not up for the task of leading the country for another four years.

Biden struggled to mount an effective defense of the economy on his watch, at one point appeared to lose his train of thought and ended an answer with the statement that “we finally beat Medicare.” He brought up his administration’s botched withdrawal from Afghanistan unprompted and repeatedly mixed up “billion” with “million.”

When he wasn’t speaking, he stood frozen behind his podium with a confused expression and his mouth hanging open. According to The New Yorker “The true locus of the President’s humiliation onstage was not his misbegotten words but the sorry pictures he made with his face.”

The New York Times described Trump’s debate performance as being made up of relentless attacks and falsehoods but later wrote that “As Biden Points to His Past, Supporters Are More Worried About His Future.”

In the months before the debate, polls had showed that Donald Trump had a 1% edge on Joe Biden but that voters overall were not happy with either candidate. Only 35% of those polled rated Biden’s work in office favorably. Nearly half of the respondents said that they were “not at all” confident in Biden’s physical or mental fitness or in Trump’s ability to act ethically in office. 43% of respondents expressed a lack of confidence in Trump’s respect for democratic values.

It’s unusual for even one major-party candidate to be this unpopular — let alone both of them. On the day of the debate, national polling averages between Biden and Trump were tied. Since then, they have sharply diverged with Trump now holding a two-point lead.

During the debate, prediction markets reacted in real time and PredictIt - a political betting market, gave Trump a 61 per cent chance of winning by end of the debate, having started the debate at 53 per cent.

This weekends assassination attempt on Donald Trump has possibly helped his campaign.  Rob Casey, of Signum Global Advisors wrote in a note that “The event has the potential to increase Trump’s support by highlighting his vigor, motivating his base, and eliciting sympathy.”  The attack additionally makes it more difficult for The Democrats to run attack ads during the next few weeks, while Republicans can take advantage of the situation to blame fearmongering rhetoric from senior democrats for the attack.

Considering the differences between these two candidates and the different sectors that might thrive under Trump versus Biden. If it’s reasonable to believe that market participants are now pricing in a Trump victory how is this showing up in markets, and should investors adjust their portfolios to take the changing probabilities into account?

While some polls are showing that Biden’s poor debate performance has not harmed his chances, Polls in a number of swing states have tipped in Trump’s favor, with Michigan and Wisconsin flipping from a Biden lead to a small Trump advantage, according to FiveThirtyEight polling averages. 

In Pennsylvania, where Biden spent the most on adverts, the narrowing gap between the candidates widened after the debate, with Trump taking the lead.

While no new polls have come out since the assassination attempt, Trump’s odds of winning the election saw an immediate rise in betting markets. As of the time of this recording, the odds on Polymarket have risen to – almost 70%.

While the track record of betting markets on the morning of an election day is excellent, they tend to fluctuate significantly based on news reports in the lead up to elections. In 1981, Ronald Reagan got a huge ratings surge after he was shot, but that boost evaporated within a few weeks as the news cycle moved on.

After the assignation attempt on Saturday, people like Bill Ackmann and Elon Musk announced their endorsement of Trump – praising his composure.  Having watched the debates, it’s not obvious to me that Biden would have even flinched in such a situation.

Both Biden and Trump are older than any prior US president. Not just that, but Bill Clinton who took office in 1993 - 31 years ago, George W Bush who took office 23 years ago and Barack Obama who took office 15 years ago are all younger than both Trump and Biden.

If you are looking for a young candidate – I guess you can vote for RFK Junior – who despite having junior in his name is still 70 years old.

Even before the disastrous debate performance, Biden’s age and general health had been an issue with voters, and the debate only reinforced the public’s deep-seated concerns.

After the debate the Biden Family convened at Camp David – the presidents country residence – which was named after President Eisenhower’s grandson in 1953.  Amusingly David Eisenhower – who it is named after is younger than both Trump and Biden.

The scale of the crisis for the Democratic Party in the wake of the debate is hard to overstate. While there are ways for the party to replace Biden, the most likely way out is for Biden himself to decide to step aside. In such a situation Biden would release the Democratic delegates who are pledged to him; competing candidates could then spend the weeks before the Party convention pitching themselves to delegates and the public, and the party convention would then vote on who to endorse in late August.

While Americans - used to long drawn-out election campaigns worry that a new Democratic Party candidate would not have enough time to make their case to the voting public before the election in November, in most parts of the world elections happen much more quickly than in the United States.  Rishi Sunak only called a UK election (in his rain drenched speech) on the 22nd of May, and the vote occurred six weeks later on July the fourth.  There is still plenty of time for a new candidate to be announced and for a campaign to be run.

The next big events for the US election include the formal party nomination conventions in July and August, and then a second debate in September. 

I initially held back on making a video on this topic as it seemed likely that a replacement Democratic Party candidate would be announced, and my video would be immediately out of date.  While that still seems likely to me, Biden insisted at a press conference on Thursday at the end of a NATO summit that he was not stepping down. He said, “If I slow down [and] I can’t get the job done — that’s a sign I shouldn’t be doing it.” “But there’s no indication of that yet.”

The same day, he referred to Kamala Harris, the vice-president, as “vice-president Trump” and earlier in the day called the Ukrainian leader Volodymyr Zelenskyy - “President Putin.”

In trying to understand the effects of political leadership on the stock market, the first good paper on this topic that I found was written by friend of the channel Victor Niederhoffer along with Steven Gibbs and Jim Bullock in a 1970 paper called Presidential Elections and The Stock Market.  In order to test the hypothesis that the market prefers Republican presidents they looked at stock market returns on the day after election results were announced and found that after a Republican win, the stock market rose an average of 1.12%, whereas after a Democrat win, the average next day return was -0.81%. They found that market movements during the week and month following the election were qualitatively similar to those the day following the election with the stock market rising after a Republican victory and declining after a Democrat victory.

They then looked at market returns broken down by year of the administration and party in power to see if markets performed significantly better during a Republican administration than during a Democratic one.  They found no systematic differences in the performance of the market during Republican and Democratic administrations, meaning that there was no long-term pattern in market movements to justify Wall Streets Republican bias.  The authors pointed out that there had only been eighteen Presidential elections since the beginning of the modem Dow-Jones Averages and that this was not enough for statistical significance.

Research by Trevor Jennewine looking at the S&P 500 – since its inception in 1957 found that the S&P 500 achieved a median Compound average Growth Rate of 9.3% under Democratic presidents and 10.2% under Republican presidents but found that when he looked at yearly returns rather than returns over the entire presidency - the relationship flipped giving the democratic party the edge.

This type of analysis might be useful when campaigning, (as a politician can claim that their party is good for the stock market) but is not awfully useful for investors, as there is of course a lag between policies being implemented and their effects on markets.  Does a president get to take credit for stock market performance during their first year in office, when the market may be rising or falling due to policies put in place by the prior president? I think we all know that they will take credit for a rise and blame the last guy if there is a decline.

A good example of this is that republicans will tell you that the bad stock market performance under President Bush was caused by Bill Clintons rewriting of the Community Reinvestment Act in 1995, which put pressure on banks to lend in low-income neighborhoods, leading to the credit crunch.  Democrats will deny this.

While presidential policy and congressional legislation do (of course) impact the economy, no single president or political party ever has complete control. If you were to only invest in the stock market during Republican or Democratic presidencies you would experience a major shortfall versus investing in the index regardless of the political party in power.

So, are there industries then, that outperform under Republican or Democrat presidents? Well, a 2005 paper by Stangl and Jacobsen of Massey University in New Zealand found that despite a popular belief that certain industries in the United States do better under one political party versus the other, adjusted industry returns show no such relationship exists and differing industry returns are better explained by macroeconomic events.

Even if this was not the case, I don’t think there are many Republicans who would claim that Trump is a typical Republican candidate.  If we compare him to George Bush Senior who enlisted in the US Navy on his 18th birthday, becoming one of the youngest US Navy pilots, who then got married at age 21 to Barbara Bush, moved to Midland Texas to work as an oil field equipment salesman. Went on to co-found a drilling company which made him a millionaire before the age of 40. Bush was then elected to the House of Representatives, became an ambassador, then the head of the CIA before becoming Vice President and finally President. 

There is not much overlap between a guy like that and Donald Trump – who led a very different life. It’s not really reasonable to draw much of a line between how one of these men might behave in office versus the other just because they are both Republicans.    

There is a really interesting interview on the Hidden Forces podcast where Demetri Kofinas interviewed Henry Olsen and they discussed how the traditional ideas of right and left make little sense today.  I’ll put a link to it in the description. Olsen argues that the changes in the meaning of right and left is not just an American thing, it can be seen around the world.

The terms “right” and “left” first appeared during the French Revolution when members of the French National Assembly divided into supporters of the King who sat to the president's right and the more radical supporters of the revolution who sat to his left.  

In more recent history, the left attracted poorer less educated voters who favored state intervention in the economy (to prevent the wealthy from taking advantage of them) and in private life, where they wanted the state to protect minority groups. The left were historically less interested in the use of force overseas too.  The right – on the other hand - was made up of the wealthy and educated who opposed trade unions and favored small government and low taxes.  This group wanted to see economic growth as they benefited from it.

According to Olsen, working class and lower middle-class voters today are more likely to vote for the populist right – people like Trump, Farage and Le Pen – because state provision and control no longer matters for this group as neither political party is threatening to take away their benefits or their rights, but no one is offering them good jobs either. The new right are no longer traditional conservatives, they are instead people who are unhappy with the status quo.  This group choose very different candidates than the old right chose.

So, what about the new left then? Well, economic growth really worked out for upper middle-class college educated people over the last thirty or more years.  This group tends to be secular and internationally focused, and Olsen argues that they are drawn to the center left (not the hard left) as they feel that the center left represents their cultural concerns, their environmental concerns and so on. This group are interested in – what are today described as - woke ideas - that are of little interest to the working class who used to vote for the left.

Olsen argues that we need new terms for these new political groupings, as while the terms right and left – as they have been used historically - may have made sense thirty years ago, but they are mostly meaningless today.  

With this context, it’s not obvious that Trump or Biden necessarily represent the groups or the ideas that the Republican or Democratic Parties represented in the past, so looking at historical stock market returns through a political lens – is not really useful – as the political parties no longer represent what they used to.

Back in 2000, a portfolio manager I knew bought Haliburton stock for the accounts he managed on the reasoning that the new vice president Dick Cheney had stepped down as the CEO of Halliburton, but still owned lots of stock and would possibly make decisions that were good for that company.  There were plenty of allegations during the Bush presidency of Dick Cheney’s conflicts of interest and of contracts being inappropriately awarded to Haliburton, but the stock price declined around 8 percent over Bush’s term.

The point of this story is that even if a leader has a specific wish to boost a given stock, or stock market sector, it doesn’t mean that they will be able to.  A lot can happen to thwart their plans.  Thus maybe it’s not worthwhile worrying too much about what politicians might want to happen.

Forbes estimates Trump’s net worth at 7.5 billion dollars, the majority of which comes from his ownership of Truth Social – a meme stock. Other than that, he has commercial real estate investments which will have struggled in recent years due to the move towards working from home and higher interest rates.  He might have an urge to boost commercial real estate – but that doesn’t mean he will be able to.

So, what do the two candidates stand for, and what sectors of the economy might make big moves if the stock market started to price in a Trump presidency?  Trump might be expected to start undoing some of the legislation passed by Biden over the last four years.

Bidens inflation reduction act which contains 1.2 trillion dollars in new spending and tax breaks (according to Goldman Sachs) was put in place to boost clean energy, reduce healthcare costs, and increase tax revenues. If elected, Trump might not be able to repeal the law unilaterally, but he could possibly work to make its implementation more difficult by hindering it through executive action by tightening limits on tax credits, holding back some of its loans and grants, or revising treasury department rules that haven’t yet been finalized.

The IRA includes a suite of tax credits for carbon-friendly energy sources and electric vehicles as part of an effort to protect the climate. It also includes money for grants that subsidize climate-friendly or pollution-cutting projects and a program to punish oil and gas companies for methane leaks.

Looking at the performance of clean energy ETF’s in the weeks since the debate, it is not obvious that investors are concerned about this being unwound.  The Net Zero – Paris aligned equity ETF is up about three percent since the debate.  

A lot of investors believe that a Trump victory would be good for the oil industry. If we look at the return of oil majors like Exxon Mobil, we can see that it is down slightly since the debate, as is the drilling equipment company Schlumberger which would be expected to benefit from increased fracking. Drilling contractors like H&P and Nabors are up a little, but nothing significant.

Chinese stocks like Ali Baba and Baidu are up since the debates – but I’m not sure they would be expected to do any better under Biden than Trump.  Neither candidate is pitching themselves as being China friendly.  First Solar, an American solar panel manufacturer who would likely benefit from increased tariffs on Chinese imports is up slightly since the debate, but once again, nothing out of the ordinary.

Trump owns a lot of real estate and so maybe he would try to boost commercial real estate values while in office.  He might want to influence the fed to lower rates – for example.  When we look at the Vanguard Real estate ETF returns, we can see that it has done well since the debate, but that could be explained by the lower inflation numbers that came out last week. 

Gun companies tend to do better when a Democrat is elected as gun enthusiasts tend to stock up on firearms in fear that democratic politicians will introduce tough new gun laws.  Investors are well aware of this phenomenon, but once again we see no effect when looking at stocks like Smith and Wesson which barely budged in the weeks after the debate.  To be clear – I am looking at these stock prices over the weekend and they will not have been impacted by the assassination attempt as of the time of this recording.

On Wall Street – the bet that Trump’s return to the White House will bring about more inflation and higher interest rates has been known as the Trump Trade in recent months. Many of Trump’s core policies lean in an inflationary direction: tariffs would push up the price of imports, a crackdown on immigration could push up wages and deficit-financed tax cuts would juice the economy. Should these policies bring about inflation, the Federal Reserve would have to hike interest rates.

While changes in the still inverted Treasury yield curve have mostly been driven by changing expectations about the Fed's first rate cut in this cycle, the gap between 2-year and 30-year notes has narrowed to a negative 6 basis points from a negative 30 bps around the time of the Biden-Trump debate. The spread between the two- and 10-year Treasury yields is at a negative 27 basis points, half the levels three weeks ago. So bond investors are possibly beginning to price in a Trump win.

The magnificent six stocks have been the big driver of stock index returns over the last year and a half driven by a belief that huge profits will materialize from artificial intelligence investments made by the tech giants. This boom is not really related to politics. There is no reason to believe that Biden caused the megacap tech stock growth, or that a Trump presidency would have any effect on the prospects of these companies.

Part of the reason that markets may not be reacting to the increased odds of a Trump victory is that Trump is extremely unpredictable.  In 2016 it was widely predicted that he would be very bad for the stock market, but the stock market boomed during his presidency before selling off at the start of the pandemic.  Investors might not be placing any big bets – simply because they have no idea what he will do if elected.

Investors appear to be somewhat nervous about JD Vance who is widely seen as a top contender for vice president under Trump. We don’t yet know who Trump’s VP will be but Trump has described his search for a Vice President as a “highly sophisticated version of The Apprentice.” We can only hope that it is more sophisticated than a reality TV show.

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Vance’s economic populism worries investors and the business community, as many of his policy ideas would traditionally fit squarely within the left wing of the Democratic Party.  As an example, he drew headlines earlier this year for praising FTC chair Lina Khan – who is widely viewed as being anti-business.  Vance is once again not a traditional republican. 

According to Andrew Prokop at Vox - Some Democrats see scaremongering over “project 2025” as the ace in the hole that could save Biden’s struggling reelection campaign.  Project 2025 is a 922-page plan that was drawn up by the Heritage foundation and more than 100 other conservative groups for what the next Republican president should do when he takes power.  Now – lets be serious – Trump is not going to read anything that is 922 pages long…

Project 2025 involves concentrating power in the presidency and focusing on long-term conservative policies.  It was however drawn up in 2023 before Trump had won the nomination and without his involvement.  It is also - nothing new - as Heritage have been drawing up plans like this to influence conservative presidents since 1980.

Trump has publicly disavowed project 2025 – saying that he knows nothing about it.  It is – as I mentioned 922 pages long…

One of the biggest differences between the two candidates is their views on tax policy. Many provisions of Trumps Tax Cuts and Jobs Act of 2017 are set to expire at the end of 2025. If the provisions are extended by Trump, Americans would see lower tax rates in the coming years, but a growing budget deficit. The Trump campaign is not necessarily in favor of growing the deficit but have not explained how they plan to address deficit concerns. They have discussed the possibility of additional tariffs on imported goods as a method of boosting revenue.  Not much is actually clear – but of the two candidates, Trump is pitching lower taxes than Biden.

During his term in office, Trump implemented tariffs on Chinese imports, and President Biden continued most of them, adding on additional tariffs. Both Trump and Biden are likely to pursue fiscal stimulus policies to boost the economy, although likely with different combinations of tax incentives and higher spending.

An FT article by Peter Spiegel from last week describes how little American presidents have actually gotten done during their second terms in office - in recent decades.  Reagan and Clinton were bogged down by scandals – The Iran Contra Affair and the Lewinski Affair…

George W Bush was bogged down by an unwinnable war in Iraq and Obama made most of his big changes during his first term too.  

Trump is likely to be embroiled in his ongoing legal problems should he be elected, and should Biden win, any public appearances he makes, will be subjected to forensic examination for gaps in the president’s memory or any strange behavior. Any effort to shield him from the public or the press would likely be met with ferocious backlash too.

Neither of these candidates are traditional presidential nominees.  It is not obvious that either of them will get much done if elected either.  For most investors, it probably makes sense to stay the course with any long-term investment plan they have rather than trying to predict the actions of two extremely unpredictable politicians, and then predict how these actions will impact individual stocks.

Political affiliation can directly affect an individual’s optimism for the the future direction of their country or its economy. This type of partisan bias can harm an investors objectivity, especially in a year like this that is so politically charged.  As always, investors typically do best when they formulate a sensible long term investment plan and then stick to it – harvesting the long term returns that markets provide.

Thanks for tuning in for this week’s podcast which is financed by our supporters on pateron.  If you want to support the podcast you can find a link in the show notes.  Have a great week and talk to you in the next podcast, bye.