Cycle Capital: The Impact of the US Election on Asset Prices and the Main Logic of 'Trump Trade'

Original author: Lisa, LD Capital

一、General Election Overview

On June 28th, Beijing time, Biden and Trump held the first debate for the 2024 election. Trump's performance was significantly dominant, while Biden's poor performance raised widespread concerns among the public about his ability to handle the presidency at an advanced age. After the debate, Trump's approval rating surged significantly. At the same time, Trump also has overwhelming advantages in swing states, leading in all 7 major swing states (North Carolina, Arizona, Georgia, Nevada, Wisconsin, Michigan, and Pennsylvania).

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There are three key moments in the future election: 01928374656574839201

1. The National Conventions of the two parties: 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, where each party will nominate its candidates for President and Vice President.

2. The second round of candidate debates: September 10, 2024.

3. Presidential Election Day: November 5, 2024.

2. Major Policy Differences

Trump and Biden agree relatively on infrastructure, trade, diplomacy, expanding investment spending, and encouraging manufacturing to return. However, they have significant policy differences in finance and taxation, immigration, and the new energy industry.

1. Finance and Taxation

Trump advocates continuing to reduce corporate income tax from 21% to 15%, and does not advocate directly increasing fiscal spending; Biden's Balancing Act, on the other hand, calls for higher tax rates for businesses and the wealthy to 28 percent, while continuing to forgive student loans. In the last administration cycle, Trump's tax cuts boosted U.S. stock earnings and promoted the return of overseas funds, and the tax cuts proposed in this round of the election were weaker than those of the previous year (the previous round of tax reform adjusted the tax rate from 35% to 21%), and the boost effect was relatively weaker than that year. CICC estimates that the S&P 500's net profit growth rate in 2025 will increase by 3.4 ppt to 17% from the consensus expectation of 13.7%.

2. Immigration

Since President Biden's inauguration in 2021, there has been a significant increase in illegal immigration in the United States. Compared to Biden's lenient immigration policy, Trump advocated for further tightening of immigration policies, but with relatively relaxed requirements for 'high-level' talents. The tightening of immigration policies may weaken the momentum of the US economy rise and accelerate wage rise.

3. Industrial Policy

The two have significant differences in energy and other areas. Trump advocates a return to traditional energy, accelerating the issuance of oil and gas exploration permits, increasing the development of traditional fossil energy, etc., to ensure America's cost advantage in energy and power. At the same time, he may cancel green subsidies for new energy vehicles and batteries. Biden, on the other hand, advocates continuing to promote the development of clean energy.

4. Trade Policy

Both Biden and Trump have implemented high tariff policies, which may increase the cost of importing raw materials and commodity prices in the United States, pumping up CPI and forming resistance. Compared to Trump, Biden's policy is more aggressive. In May, Biden announced additional tariffs on Chinese imports, with the scope covering only $18 billion worth of goods, and some of the tariffs will not take effect until 2026. Meanwhile, Trump has stated that a 10% benchmark tariff will be imposed on goods entering the United States, along with an additional 60% or higher tariff on China, and a "specific tax" will also be imposed on certain regions or industries.

It can be found that the green arrow of Trump in the above figure is obviously longer, and his tariff policy, internal tax reduction, and immigration policy are all unfavorable to the fall of inflation.

Three, General Characteristics of Asset Prices in Election Years

First of all, looking at the whole year, there is no significant difference in the overall performance of the market and the change in the federal funds interest rate compared to other years in the election year.

Looking at quarterly and monthly data, in the pre-election period (mainly referring to the third quarter of the election year), the Fluctuation of the federal funds Intrerest Rate is significantly smaller than in other quarters, while asset prices show higher Fluctuation during this period. The reason behind this may be that the monetary policy tends to remain unchanged before the election to avoid suspicion, while asset prices Fluctuate due to the uncertainty of the election results. In contrast to the strong seasonal patterns in the non-election years from October to December, stock prices in October before the election year perform significantly weaker than in non-election years.

Four, Review of Market Situation after Trump's Last Election

On November 9, 2016, the preliminary results of the US presidential election were announced. Republican presidential candidate Donald Trump won the election and became the 45th President of the United States. At that time, Trump's victory exceeded market expectations, causing asset prices to fluctuate, and the market bet on the "Trump Trade". From November to December 2016, there was a high interest rate on US bonds, a strong US dollar, and a strong US stock market, which declined after the expected digestion. The following are the price changes of various assets at that time (all are weekly charts).

US Treasury yields rise and then fall back

Fluctuation情况黄金先跌再rise corresponding to the yield of US Treasury bonds

Standard & Poor's pump

Nasdaq pump

BTC pump

The start time of this round of 'Trump Trade' has been greatly advanced, and the market's expectation of Trump's victory has significantly increased after the first presidential debate, causing the market to start early layout of the 'Trump Trade'. The yield of 10-year U.S. Treasury bonds pumped to around 4.5% on the second day after the debate.

Overlaying the potential additional votes for Trump from the shooting incident on July 14th, the most likely outcome is Trump's election as president and Republican control of both houses of Congress. It is foreseeable that the shooting incident involving Trump over the weekend will bring a pump market to the upcoming Monday stock market.

5. Summary

Impact of the US election on the market:

1）The election itself cannot be used as a reason for bullish trading. The simple logic that the Democratic Party needs the US stock market to stay pumped in order to win the election does not hold true.

2. There is a downside risk in the market around October, during regular election years, due to increased volatility.

3. The main direction of the election result (Trump Trade) is long CPI, long US Intrerest Rate (here, 'long' is relative to the market's downward expectations, meaning resistance to the CPI and US Intrerest Rate, not absolute pump), short gold, long US stocks but not as strong as when Trump was elected last time; long BTC (believing that BTC is more long with US stocks, and the deviation from US stocks is not sustainable in the long term & Trump is crypto-friendly).