The impact of the US election on asset prices and the logic of the "Trump Trade"

Source: Cycle Capital Research

1. General election overview

On June 28, Beijing time, Biden and Trump held the first debate of the 2024 election. Trump While Biden's performance clearly prevailed, Biden's poor performance triggered widespread concerns about his mental ability in his advanced age. Trump's approval rating surged after the debate. At the same time, Trump also has an overwhelming advantage in swing states, leading in the seven main swing states (North Carolina, Arizona, Georgia, Nevada, Wisconsin, Michigan and Pennsylvania).

There are three more critical points in the future election: p>

1) Bipartisan National Conventions: The Republican National Convention on July 15-18, 2024, and the Democratic National Convention on August 19-22 will select the party’s presidential and vice presidential candidates respectively.

2) Second round of candidate debate: September 10, 2024.

3) Presidential election day: November 5, 2024.

2. Main Policy Differences

Trump and Biden have relatively consistent views on infrastructure, trade, diplomacy, expanding investment spending and encouraging the return of manufacturing. There are large differences in policies on immigration, immigration and new energy industries.

1) Finance and Taxation

Trump advocates continuing to reduce the corporate income tax from 21% to 15%, and does not advocate directly increasing fiscal expenditures; while Biden’s “balanced approach” The "Balancing Act" advocates raising tax rates on corporations and the wealthy, raising the corporate tax rate to 28% while continuing to forgive student loans. During the last administration cycle, Trump’s tax cuts boosted U.S. stock profits and facilitated the repatriation of overseas capital. The tax cuts proposed in this round of elections are weaker than those in the past (the last round of tax reform adjusted the tax rate from 35% to 21%). The boosting effect is also relatively weaker than in the past. CICC estimates that the net profit growth rate of the S&P 500 Index in 2025 can increase by 3.4ppt to 17% from the market consensus expectation of 13.7%.

2) Immigration

Illegal immigration in the United States has increased significantly since Biden was sworn in in 2021. Compared with Biden's moderate immigration policy, Trump advocates continuing to tighten immigration policies, but relatively relaxing the requirements for "high-level" talents. Tightening immigration policy may weaken the momentum of U.S. economic growth and push wage growth to accelerate again.

3) Industrial policy

There are major differences between the two in areas such as energy. Trump advocates returning to traditional energy, accelerating the issuance of oil and natural gas exploration licenses, and increasing the development of traditional fossil energy to ensure the United States' cost leadership in energy and electricity. At the same time, green subsidies for new energy vehicles and batteries may be canceled; Biden It advocates continuing to promote the development of clean energy.

4) Trade policy

Both Biden and Trump have implemented high tariff policies, which may push up the cost of imported raw materials and commodity prices in the United States, thereby creating resistance to the downward trend of CPI. Compared with the two, Trump’s policies are more radical. Biden announced in May that he would impose additional tariffs on Chinese imported goods. Biden's additional tariffs only cover US$18 billion in goods, and some of the additional tariffs will not be implemented until 2026. Trump stated that he would impose a 10% base tariff on goods entering the United States, while imposing additional tariffs of 60% or higher on China, and would also impose "specific taxes" on certain regions or industries.

You can find that Trump has significantly more green arrows in the picture above. His tariff policies, domestic tax cuts and immigration policies are not conducive to the fall of inflation.

3. General characteristics of asset prices in election years

First of all, from a full-year perspective, the overall market performance and the range of changes in the federal funds rate during the election are not the same as those in other years. Significant differences.

Looking at quarters and months, in the pre-election period (mainly the third quarter of the election year), the change in the federal funds rate is significantly smaller than in other quarters, while asset prices show higher volatility during this period. Rate. The reason behind this may be that monetary policy tends to remain on hold as the election approaches to avoid suspicion, while asset prices fluctuate due to the uncertainty of the election results. Contrary to the seasonal pattern that is often stronger from October to December in non-election years, the stock price performance in October before the election is significantly weaker than in non-election years.