Biden is out, but what will be the difference?

US Election 2024

Biden is out, but what will be the difference?

Althea Spinozzi
Head of Fixed Income Strategy

As Biden exits the U.S. presidential race, markets are buzzing with speculation about the future. The potential shift in power has investors reassessing the much-debated Trump Trade and pondering the implications of a Democratic versus Republican victory.

What is the Trump Trade and why is it being questioned?

The Trump Trade suggests that certain sectors of the U.S. economy, such as banking, industrials, and energy, would benefit from deregulation and tax cuts. Bitcoin is favoured, while fixed income, especially U.S. Treasuries, appears less attractive due to expected fiscal spending and the resulting upward pressure on bond yields.

With Biden withdrawing, and Democrats possibly having a higher probability of winning, the market is evaluating a scenario without the Trump Trade. Although fiscal spending is expected to remain high, benefiting lower and middle classes, the impact on U.S. Treasuries could still be bearish due to increased yields.

How is the bond market reacting to the US election?

The potential for significant fiscal spending under either administration is putting pressure on bond yields. This fundamentally means that regardless of which political party wins, there will likely be a lot of government spending.

A Republican victory, continuing the Trump Trade, implies increased fiscal stimulus, pushing bond yields higher and reducing fixed income attractiveness. Conversely, a Democratic win might also maintain high spending levels but could focus on different fiscal priorities, still pressuring bond yields upward. When yields increase, new bonds offer better returns than existing ones, making the older bonds less valuable. As a result, investors might be concerned about holding bonds, anticipating lower prices and potential losses on their current bond investments.

Which stock market sectors will be impacted by either a Democrat or Republican president?

As discussed in previous notes, Democrats in the White House could bolster sectors such as healthcare, technology, and renewable energy, maintaining their recent gains. Republicans would favour banking, industrials, and energy sectors, driven by deregulation and fiscal policies conducive to these industries.

What to expect from financial markets till Election Day?

As the election approaches, market volatility is expected, influenced by news regarding the presidential campaigns. However, hard data will ultimately drive asset performance. The U.S. economy's deceleration, rising unemployment, and stable inflation nearing 2% suggest the Federal Reserve might cut interest rates, potentially boosting bonds and overall stock markets.

The upcoming U.S. presidential election introduces significant uncertainty into the markets. While a Trump Trade scenario favours certain sectors and assets, a Democratic win could continue the momentum in others. Investors should brace for volatility and focus on economic indicators to navigate this period.

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