The markets start to anticipate a Trump victory

The assassination attempt against Donald Trump is also making an impact on investor mood. The event has further reinforced the tycoon’s chances of occupying the White House again, which were already significantly high following President Joe Biden’s weak performance at the televised debate of June 27. The market is beginning to see a Trump victory at the polls as increasingly likely, and it is anticipating it in two ways: first, in a search for refuge following the shock of the failed assassination and, on the other hand, with a longer-term view that expects a Republican presidency to bring lower taxes, higher tariffs and fewer regulatory controls. A scenario in which small stocks and banking could especially benefit.

On Thursday Trump will be officially proclaimed the Republican candidate at the national convention, and he is going into the event with the polls in his favor. In a note on Friday, before the attack, Goldman Sachs said that reflecting the change in the odds, “we have received a flood of questions from investors over the past two weeks.” These questions boil down to “what should investors do if the recent political momentum drags on.”

Wall Street opened higher on Monday, after the Dow Jones and S&P 500 had already hit record intraday highs on Friday on expectations of a rate cut in September. The market also reacted on Monday with an increase in U.S. bond yields, in contrast to slight declines in European bond yields. Thus, the yield on the 30-year U.S. bond, at 4.45%, exceeded that of the two-year bond for the first time since last January. And the dollar has appreciated against the G10 basket of currencies, with the Mexican peso retreating more than 1% against the greenback.

But although the market gains on Monday were widespread, two businesses have benefited the most: private prisons and weapons. Companies dedicated to the management of private prisons had their particular moment of glory during the years of the Trump Administration. It is a business monopolized by two main operators, Geo Group and Core Civic, which on Monday registered stock market rises of 9.35% and 8%, respectively. Trump’s proposals to strengthen anti-immigration laws are behind the stock market reaction. The market is figuring that these measures will result in an increase in arrests, which will serve as a catalyst to the revenues of this industry, which recorded record revenues under the Trump administration.

But this is not the only business that reacted to the attack on Trump with stock market gains. Considered a prominent member of the National Rifle Association (NRA), the Republican candidate said in May that if he returns to the White House, he will adopt measures to protect Second Amendment rights that allow Americans to carry firearms. On Monday, gun manufacturers Sturm Ruger and Smith & Wesson registered stock market increases of 5.39% and 11.38%, respectively.

Inflationary pressure

A Trump administration would be a likely element of inflationary pressure, given the potential for tax cuts and the 10% tariff that he would seek to apply to all imports, including European ones, which could revive the trade war he declared in 2018 and 2019. Rate cuts would be more difficult in that context. But on the other hand, the eruption of political violence is undoubtedly an element of concern about America’s institutional stability that could push investors towards safe-haven assets.

At Julius Baer, investment experts point to a safe-haven search in the short term, in reaction to Saturday’s attack, but also to a subsequent appetite for risk as the expectation of Trump’s victory takes hold. “The extraordinary assassination attempt on Donald Trump over the weekend may lead investors to seek safe-haven assets such as the U.S. dollar, gold, the Swiss franc, government bonds and high-quality equities. Donald Trump’s election chances have risen sharply. If successful, it would signal a shift to a more risk-taking mode in the markets, with higher growth expected in 2025 due to lower taxes and business-friendly policies,” said Christian Gattiker, head of research at the Swiss firm.

The banking sector, healthcare and the oil industry are seen by investors as the biggest beneficiaries of a possible second Trump term. Also the big tech companies, which would enjoy less regulatory oversight under the Republican tycoon. Meanwhile, greater trade tension would undoubtedly be especially beneficial for companies with greater domestic exposure and less dependent on foreign supplies. In that sense, U.S. small stocks are a clear investment asset in the face of a Trump victory, although Goldman Sachs also notes that these can be a double-edged sword. They are more sensitive to economic growth and performed better than the rest of the market after Trump’s victory in 2016 but, on the other hand, weaker balance sheets and low productivity play against small companies in an environment of persistently high interest rates. For small caps to outperform, post-election policy would have to significantly improve the outlook for economic and earnings growth without putting upward pressure on rates, Goldman Sachs notes.

Trump’s growing chances of winning the presidential election come at a time of high valuations in the U.S. stock market and heightened expectations of rate cuts by the Fed at the September meeting, although the Republican magnate’s victory would also be a powerful consideration for Fed Chair Jerome Powell. Given that Trump’s economic proposals are more inflationary than Biden’s, the Fed may be more reluctant to cut rates, a scenario that would undoubtedly impact fixed income but could be a trigger to extend the stock market rally.

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