Countdown to the general election, Trump trades "comeback"

This article is from Guotai Junan

Abstract

Affected by the unexpectedly strong September non-farm payroll data and the resurgence of core inflation, the two main themes in the US stock market, "recession trade" and "rate cut trade," have been cooling down. However, with Vice President debate favoring Wansley and recent poor performance in interviews by Harris, Trump's poll support has surged, bringing back the "Trump trade."

It is easy to see from the recent market trends that the trading logic dominated by the "rate cut trade" has faded after the Fed's first rate cut, while the "tax cuts + easing" core of the Trump trade has made a comeback. Combining Trump's previous term and his statements during this election process, Trump's policy framework of "tax cuts + easing" is relatively clear. This will overall boost US inflation and interest rates, increase the attractiveness of US dollar assets, and provide favorable support for the overall performance of the US stock market.

Looking back at 2016, the market had relatively conservative expectations for Trump's victory. After his eventual win, it caused significant volatility in financial market asset prices, and in November 2016, the "Trump trade" swept through the entire market. At that time, influenced by expectations of tax cuts and increased fiscal stimulus by the Trump administration, the S&P 500 index, Nasdaq index, and Dow Jones index rose by 3.42%, 2.59%, and 5.41% respectively.

Compared to 2016, this round of the "Trump trade" started earlier. Although the trading logic has fluctuated, as the election day approaches and Trump's poll support rises, the logic of the "Trump trade" becomes clearer. Firstly, the S&P 500 continues to break through highs, indicating that market risk appetite continues to rise. Secondly, the Fed's significant 50 basis point rate cut in September and Trump's "America First" policy will further stimulate US companies, especially small and medium-sized enterprises, with profit expectations expected to rise.

Investment advice: Until early November, rate cut trades, recession expectations, and the US election will continue to collectively influence the US stock market. Considering that a soft landing of the US economy is still the baseline expectation, the risk appetite of the US stock market is expected to continue to rise. In addition, with Trump's poll support leading again and the logic of the "Trump trade" warming up again, it is recommended to continue to be optimistic about the prospects of cyclical and value stocks in the short term. From an industry perspective, sectors such as information technology, energy, and finance are expected to perform better.

Trump's Poll Support Surges

With less than a month left until the US election "result day" on November 5, 2024, Trump's poll support has surpassed Harris. In the only TV debate between the two presidential candidates in the September 2024 US election, and also the first direct confrontation since Harris became a candidate, Harris vigorously attacked Trump's policies and achieved a "decisive victory," leading in poll support. However, with less than a month left until election day, Trump's support has risen again and surpassed Harris. According to data from the well-known prediction market platform Polymarket, after reaching a tie on October 3, Trump's support rate continued to rise, and as of October 14, Trump's support rate has surged to 54.0%, significantly ahead of Harris's 44.5% Trump's running mate Pence had a slight edge in the US vice presidential debate, boosting Trump's support to catch up with Harris. In the vice presidential debate held on the evening of October 1st, Pence and Harris mainly clashed on issues such as abortion, healthcare, economy, immigration, climate change, and the Middle East. From the results, Pence won on more macro issues such as immigration and the economy due to his more holistic thinking and flexible debating skills. A survey by CBS/YouGov of 1,630 potential voters showed that 42% believed Pence won, while 41% believed Harris won; CNN's instant poll showed that 51% thought Pence won, while 49% thought Harris won. After the debate, Polymarket showed Harris' lead gradually shrinking. Following dissatisfaction with the Biden-Harris administration's Middle East policy, Harris' support rate dropped again.

In addition, Harris performed poorly in an interview with CBS's flagship political program "60 Minutes" on October 7th, further expanding Trump's lead in the polls. Although Harris responded to questions about her vague political stance on "immigration" policy during the interview, the answer of "building consensus" clearly did not satisfy Americans, especially Democrats. After the program aired, Harris' poll support rate plummeted.

Trump has overtaken Harris in the majority of swing states' poll support rates, competing for a "laying win" in electoral votes. It is worth mentioning that in the statistics of Real Clear Politics, although Harris still leads in national polls, Trump's poll results reversed the lagging situation on October 6th when considering "electoral votes" on a state-by-state basis, leading Harris again. This year's US election has a total of 538 electoral votes, with at least 270 votes needed to be elected as President. The current market consensus is that the Democratic Party holds 226 votes tightly, while the Republican Party holds 219 votes, so the core of the competition between the two parties lies in the 93 votes of the 7 swing states. However, in these 7 swing states, 6 have relatively clear public opinion tendencies, with only Pennsylvania having a close race. However, under a series of "reverse" operations by the Harris team recently, Trump has reversed the situation with a "laying win" posture. Since October 6th, Trump has led with 281 votes to 257 votes, achieving an electoral vote reversal; as of October 13th, Trump has taken the lead in 6 out of the 7 swing states, expanding his electoral vote advantage to 302 votes to 236 votes.

Trump Trade May Sweep the US Stock Market Again

Looking back at the recent market trends, it is not difficult to see that the trading logic dominated by the "rate cut trade" subsided after the Fed's first rate cut, and the Trump trade centered on "tax cuts + easing" made a comeback. For the US stock market, the essence of the "Trump trade" is the expected response of the economy to his policy framework in the future. In other words, the policy proposals of candidates during the election process are of significant importance to the stock market Combining Trump's previous term and his statements during this election process, Trump's "tax cuts + loose" policy framework is relatively clear. This will overall boost inflation and interest rates in the United States, while increasing the attractiveness of dollar-denominated assets, providing favorable support for the overall performance of the U.S. stock market.

Looking back at 2016, the market had relatively conservative expectations for Trump's victory. After the final victory, it triggered significant fluctuations in asset prices in the financial markets, with the "Trump trade" sweeping the entire market in November 2016. At that time, influenced by expectations of tax cuts and increased fiscal stimulus by the Trump administration, the S&P 500 index, Nasdaq index, and Dow Jones index rose by 3.42%, 2.59%, and 5.41% respectively. By sector, under the expectations of domestic investment expansion and relaxed financial regulation, the transportation, banking, and diversified financial sectors led the gains. It wasn't until January 2017 that the logic of the "Trump trade" gradually faded from the market.

Compared to 2016, this round of the "Trump trade" started earlier. Although the trading logic has experienced ups and downs, as the election day approaches and Trump's approval ratings rise, the logic of the "Trump trade" becomes clearer. Firstly, the major U.S. stock market index - the S&P 500 continues to break through highs, indicating that market risk appetite continues to rise. Secondly, the Fed's significant 50 basis point rate cut in September and Trump's "America First" policy will further stimulate U.S. companies, especially small and medium-sized enterprises, with profit expectations expected to be revised upwards. Looking at the futures market, the long positions in the Russell 2000 index continue to expand, with net positions currently at a yearly peak. In addition, based on Trump's support for traditional energy and his policy stance on reshoring manufacturing to the U.S., this is significant for oil and infrastructure. Worth mentioning is that among leveraged funds in the futures market, the Dow Jones index is the only major U.S. stock index with a net long position advantage.

Industries that benefit from the "Trump trade" include finance, energy, and information technology. In terms of Trump's policy agenda, in the energy sector, compared to Harris's support for clean energy and tax breaks for electric vehicles, Trump promises to vigorously exploit fossil fuels, relax a series of environmental regulations, and does not support green new deal policies. Trump views Biden's electric vehicle plan as a threat to the U.S. automotive industry and economy, focusing on the development of traditional fuel vehicles, which is more favorable for the traditional energy industry. In the information technology industry, Trump's policies favor the industry's expansion. For the financial industry, Trump tends to relax financial regulations, support the development of cryptocurrencies, and the reduction of compliance costs will undoubtedly increase the overall profitability of the industry.

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In terms of industries, the "Trump trade" benefits industries such as finance, energy, and information technology. From Trump's policy agenda, in the energy sector, compared to Harris's support for clean energy and tax breaks for electric vehicles, Trump promises to vigorously exploit fossil fuels, relax a series of environmental regulations, and does not support green new deal policies. Trump views Biden's electric vehicle plan as a threat to the U.S. automotive industry and economy, focusing on the development of traditional fuel vehicles, which is more favorable for the traditional energy industry. In the information technology industry, Trump's policies favor the industry's expansion. For the financial industry, Trump tends to relax financial regulations, support the development of cryptocurrencies, and the reduction of compliance costs will undoubtedly increase the overall profitability of the industry.

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Investment advice: Before the beginning of November, interest rate cuts, recession expectations, and the U.S. presidential election will continue to collectively impact the U.S. stock market. Despite the historical peak of the U.S. stock market, considering the significant outperformance of the U.S. September non-farm payroll data compared to market expectations, and the resurgence of core inflation, a soft landing of the U.S. economy remains the baseline expectation, and the risk appetite of the U.S. stock market is expected to continue to rise. In addition, with Trump's approval rating leading again and the resurgence of the "Trump trade" logic, it is optimistic about the prospects of cyclical and value stocks in the short term. From an industry perspective, the information technology, energy, and financial industries are expected to perform better