Markets cannot afford to ignore Trump’s bid for re-election

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Investors can generally ignore the noise of national politics and focus on drier matters such as corporate earnings or monetary policy, which allows them to remain calm in the tawdry dramas and bright lights of elections.

The upcoming British general election campaign, for example, will not leave a serious or lasting mark on the country’s stocks and bonds. It’s hard to find investors with strong views on the upcoming European Union parliamentary vote in early June. The latter “reduced significance” for investors Originating from the “toothless” nature of the EU parliament, German asset manager DWS Group GmbH said. Harsh, but fair.

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Level-level strategists also point out that it is imprudent for investors to take a stance on politics in the United States. After all, the widely accepted argument in 2016 that a victory for Donald Trump would hurt US stocks proved wide of the mark.

But as November’s presidential election approaches, a calm and steady attitude will remain. In part, this is due to potentially high US fiscal policy. Unchecked and extravagant government spending puts at risk the stability of US government bonds, the bedrock of the global financial system.

However, here, reasonable people can disagree about the pain that can be inflicted. Already, bonds are trading at weaker levels than the interest rate outlook would suggest, meaning some risk has been priced in.

A bigger, and often underappreciated, dividing line for markets in US politics is immigration. This is unfamiliar territory with high stakes and two leading candidates who have drawn very different sketches.

Fund managers hit some big blind spots after the pandemic. One is the strong resilience of US consumers, supported by impressive household savings after the lockdown. Another is the economic support provided by the US fiscal expansion. The largest is the flow of migrants to the US – north of three million people in 2023, compared to one million predicted before the pandemic, according to the US Congressional Budget Office.

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Usually, investors see immigration as a rather unpleasant, divisive issue that is suitable for politics, but not for markets. However, the overshoot is large enough to make the portfolio worthwhile.

This makes the US economy bigger, generating more consumption. But it has also covered wage demands and, in doing so, helped reduce inflation and fuel expectations that interest rates may fall. Some analysts reckon it helped reduce core inflation, the measure favored by the US Federal Reserve, by half a percent.

“Immigration was a key driver last year,” said Greg Peters, chief investment officer at PGIM Fixed Income. “That spread of the labor supply eased the pressure and allowed some disinflation. Part of the extraordinary story of our U.S. is in terms of immigration.

The Federal Reserve Bank of Kansas City this month said the “extraordinary” revival in immigration after the end of the travel ban in 2022 and 2023 “appears to have helped alleviate labor shortages in certain industries that have been spreading during volatile periods.”

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Navigating the market for the rest of the year is asking investors to do an almost impossible task, and get inside Trump’s head. On the campaign trail, the incoming president has spoken of his desire for mass deportations to combat immigration that he says is “poisoning the blood” of the US.

Is he serious? Some political analysts fear that he is. Business groups expressed alarm, saying any significant immigration crackdown would cut off a vital source of cheap labour.

The issue is not entirely binary. President Joe Biden is also under pressure from Democrats to address the level of migration from the country’s southern border.

Investors are watching closely. “The scenario where stocks get pushed over the edge wanders into politics,” Michael Kelly, head of multi-assets at PineBridge Investments LLC, said. Two of Trump’s favorite topics – punishing import tariffs and a tough stance on the border issue – are both potential sources of a resurgence of inflation that could put interest rate hikes back on the agenda.

Expect this issue to be “at the fore as we head into the 2024 US election,” the economics team at Deutsche Bank AG noted.

Politics doesn’t matter to the market until it doesn’t. Investors will have little choice but to immerse themselves in the reality of Trump’s unsettling rhetoric in the coming months.

© 2024 The Financial Times Ltd.

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