With the probability of a Trump victory in November’s election remaining high, concerns are mounting about the potential impacts on economic policies and market stability, Shane Oliver, AMP’s chief economist explained in his most recent market note.
He highlighted the recent surge in Trump’s chances, which stood at more than 65 per cent last week according to betting markets, following a controversial debate and an assassination attempt that has garnered Trump increased sympathy. These have since pulled back to around 60 per cent following President Joe Biden’s announcement that he would not seek to be re-elected.
Moreover, Oliver noted the appointment of Ohio senator JD Vance as Trump’s VP candidate further solidifies a continuation of the MAGA movement, potentially signalling a shift away from traditional economic policies towards more state-driven intervention.
“There is also an increasing chance of a Republican clean sweep (with Republican’s winning the presidency and control of the House and Senate) which history shows is the worst combination for share market returns,” said Oliver.
“So far, markets have not been too fussed, but Trump’s policies could have a huge impact.”
The “obvious positives” from a share market perspective, Oliver said, are lower taxes and deregulation, both of which serve to prop up profits.
“We saw in 2017 that this saw shares surge in response to this mix,” the economist said.
But he cautioned that Trump’s stance on tariffs, immigration, and the Federal Reserve’s independence give cause to concern.
“Taken together, Trump’s policies point to a further blowout in the US budget deficit and higher inflation,” Oliver said.
“His proposed 60 per cent tariffs on imports from China and 10 per cent on all other imports would boost the average US tariff from 3 per cent to around 17 per cent or near the 20 per cent that applied after the Smoot–Hawley tariffs of the 1930s.
“This would potentially add 2.5 per cent or so to US consumer prices (as importers would seek to pass the tariff on or have to use more expensive suppliers) and take around 0.5 per cent off US GDP. And it’s hard to see other countries not responding to the US declaration of a trade war with their own tariff hikes which would accentuate the hit to growth as we saw in the 1930s.”
Higher budget deficits and inflation, Oliver said, would be detrimental to both US and global bonds, which would, in turn, negatively impact share markets.
“Australia would be particularly vulnerable,” Oliver warned.
“Exports to the US are only 4 per cent of our goods exports but roughly 35 per cent of our goods exports go to China, the demand for which would be impacted by increased US tariffs on imports from China.”
Moreover, Oliver noted that recent declines in computer chip makers’ shares, driven by fears of tougher export restrictions to China, reflect growing market anxiety.
The chief economist suggests several scenarios could alter the trajectory of Trump’s prospects.
A strong Democratic candidate replacing President Biden, the fading effect of the assassination attempt sympathy, and the potential modifications to Trump’s tariff proposals could all mitigate the impacts. Additionally, falling inflation and interest rates may continue to drive bond yields lower, providing some market relief.
However, Oliver urged investors to remain vigilant, adding: “They [Trump’s policy proposals] need to be taken seriously … particularly if the red line remains way above the blue in the next chart into November”.
