Source: Cycle Capital Research
I. 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 gained an advantage, while Biden’s performance was poor, leading to widespread concerns among the public about his ability to handle the presidency due to his old age and mental state. Trump’s support rate increased significantly after the debate. At the same time, Trump also has overwhelming advantages 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 points in the upcoming election:
1) National Conventions: The Republican National Convention will be held from July 15th to 18th, 2024, and the Democratic National Convention will be held from August 19th to 22nd, 2024. The conventions will select the presidential and vice presidential candidates for each party.
2) Second Round of Debates: September 10th, 2024.
3) Presidential Election Day: November 5th, 2024.
II. Major Policy Differences
Trump and Biden have relatively consistent views on infrastructure, trade, foreign affairs, expanding investment expenditures, and encouraging the return of manufacturing. However, they have significant policy differences in terms of taxation, immigration, and the new energy industry.
1) Taxation
Trump advocates for continuing to reduce corporate income tax from 21% to 15% and does not support increasing fiscal expenditure directly. On the other hand, Biden proposes the “Balancing Act,” which aims to increase tax rates for corporations and the wealthy, raising the corporate tax rate to 28% while continuing to provide student loan relief. Trump’s tax cuts during his previous term boosted US stock profits and facilitated the return of overseas funds. The tax reduction proposed in this election cycle is weaker than the previous one (which reduced the tax rate from 35% to 21%), and its stimulating effect is relatively weaker as well. Based on calculations by China Securities, the net profit growth rate of the S&P 500 index in 2025 can increase by 3.4 percentage points from the market’s consensus expectation of 13.7%, reaching 17%.
2) Immigration
Since Biden’s inauguration in 2021, there has been a significant increase in illegal immigration in the United States. Compared to Biden’s moderate immigration policies, Trump advocates for further tightening immigration policies but relatively relaxes the requirements for “high-level” talents. The tightening of immigration policies may weaken the momentum of US economic growth and accelerate wage growth.
3) Industrial Policies
There are significant differences between the two candidates in areas such as energy. Trump advocates for a return to traditional energy sources, accelerating the issuance of permits for oil and gas exploration, and increasing the development of traditional fossil energy to ensure America’s cost advantage in energy and power. 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 policies, which may push up the cost of imported raw materials and hinder downward pressure on consumer price index (CPI). Compared to Biden, Trump’s policies are more aggressive. Biden announced in May that he would impose additional tariffs on Chinese imports, but the scope of the tariffs only covers $18 billion worth of goods, and some of the tariffs will not be implemented until 2026. Trump, on the other hand, stated that he would impose a benchmark tariff of 10% on goods entering the United States and an additional tariff of 60% or higher on goods from China. He would also impose “specific tariffs” on certain regions or industries.
Based on the chart above, it is obvious that Trump’s green arrows are more prominent. His tariff policy, internal tax cuts, and immigration policies are all unfavorable for the decline in inflation.
III. 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 changes in the federal funds rate compared to other years during the presidential election year.
When examining by quarter and month, 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 suspicion, while asset prices fluctuate due to the uncertainty of the election results. In contrast to the strong seasonal pattern in October to December in non-election years, stock prices in October before the election year show weaker performance compared to non-election years.
IV. Review of Market Conditions After Trump’s Previous Election
On November 9th, 2016, the preliminary results of the US presidential election were announced, and Donald Trump, the Republican presidential candidate, won the election, becoming the 45th President of the United States. Trump’s unexpected victory caused asset price fluctuations in the market, leading to the “Trump Trade” phenomenon. From November to December 2016, there was a surge in US bond rates, a strong US dollar, and a strong US stock market. However, after the market digested these expectations, the trading momentum declined. The following are the price changes of various assets at that time (all on a weekly chart):
US bond yields rose and then fell.
Gold initially declined and then rose.
S&P 500 rose.
Nasdaq rose.
BTC rose.
The current round of “Trump Trade” started much earlier. After the first debate, the market’s expectation of Trump’s victory significantly increased, and the market began to position itself for the “Trump Trade” in advance. The 10-year US bond yield reached its highest point at around 4.5% on the second day of the debate.
Coupled with the possibility of additional votes for Trump due to the shooting incident on July 14th, it is highly likely that Trump will be elected president and the Republican Party will control both the House and the Senate. It can be foreseen that the shooting incident involving Trump over the weekend will lead to a rise in the US stock market on Monday.
V. Conclusion
Impact of the US Election on the Market:
1) The election itself cannot be used as a reason to trade bullish. The simplistic logic that the Democratic Party needs the US stock market to remain bullish in order to win the election is not valid.
2) There is a downside risk in the market around October, as volatility increases.
3) The main direction of trading the election results (Trump Trade) is to be long on CPI, long on US bond rates (relative to the market’s downward expectations, meaning resistance to a decline rather than an absolute increase), short on gold, long on US stocks, but with less intensity compared to Trump’s previous election; and long on BTC (considering that BTC follows the trend of the US stock market and that there is no sustained deviation from the US stock market & Trump is crypto-friendly).
