Investors are putting their money on the "Trump trade." Here's what that means.
Wall Street is assessing the potential market impact of President Joe Biden's decision to bow out of the 2024 presidential race, including how it could affect what has come to be known among investors as the "Trump trade."
That refers to what a victory at the polls in November by former President Donald Trump could mean for the U.S. economy, stock prices and individual industries and companies. Anatole Kaletsky, co-founder and chief economist of investment advisory firm Gavekal, thinks investors will likely unwind many of their bets given the changing dynamics of the electoral contest.
"This logically necessary, yet sensationally unpredictable event, should mean a major reversal for the 'Trump trades' that have fascinated Wall Street analysts since the Biden debate debacle — and even more since the assassination attempt on Donald Trump on July 13," he told investors in a research note.
"The most important and inevitable market consequence of a U.S. election that has suddenly become more competitive is a big increase in uncertainty about the outcome, which will probably persist all the way until the polls close on November 5," Kaletsky added.
Focus on trade and tariffs
To be sure, many institutional investors still give Trump the inside track, including in a matchup against Vice President Kamala Harris, and are examining how a second Trump administration could impact everything from inflation and consumer spending to monetary policy and the nation's ballooning fiscal deficit.
A Trump presidency would bring "important macro and market implications, with the key impacts likely revolving around trade policy and tariffs," Goldman Sachs analysts said in a report. For example, Trump's plan to impose universal tariffs on U.S. imports would likely benefit companies that mostly do business here at home, as opposed to global players, according to the investment bank.
The so-called Trump trade "has to do with those companies viewed as being the primary beneficiaries of a Trump presidency and the agenda he has laid out so far," JJ Kinahan, CEO of IG North America, told CBS MoneyWatch. "This is speculation — as we both know, what's said and what ends up happening can be two different things."
What's driving up stocks?
Art Hogan, chief market strategist at B Riley Wealth, also sounded a cautionary note. "The things that get said and proposed on the campaign trail are often difficult to put into place once you get to 1600 Pennsylvania Avenue," he said.
Hogan also advises against making stock predictions based on an election more than 100 days away. "Even if I could tell the results right now, I still couldn't tell you what is going to do well," he said.
"The economy drives earnings, and earnings drive stocks," said Hogan, who attributes the market's upward drift this year to S&P 500 earnings and expectations that the Federal Reserve could cut its benchmark interest rate in September.
"The assumption that we would continue with tax cuts and lower interest rates — which we were going to have anyway — is behind the recent run higher in small-cap stocks," he added.
Investors also think Trump's return to the White House would mean less regulation, a potential tailwind for heavily regulated sectors such as banking and energy.
At the same time, economists warn that Trump's plan to erect stiff new tariffs and deport immigrants would likely cause a flare-up in inflation.
Which industries could benefit?
In his acceptance speech Thursday night, Trump underlined his intention to crank up production of fossil fuels, with Kinahan noting the Republican nominee's repeated refrain of "drill, baby, drill." That would make energy giants such as Exxon among the biggest gainers under a Trump administration eager to pump oil despite the growing fallout from climate change.
Another area that investors think has upside in a second Trump presidency is cryptocurrencies. Trump, once a critic of digital currencies, has more recently sounded bullish on cryptos, while his running mate, Ohio Senator J.D. Vance, has long been a proponent.
On Friday, shares of crypto-related stocks rose even as the overall market fell, with digital currency platforms Coinbase up nearly 8%, Marathon Digital advancing 5% and Riot Platforms ahead 6.5%.
Private prison stocks including Geo Group also have risen on Trump's talk of "rounding up immigrants and putting them into detention," Hogan said.
Trump moving markets
As investors size up the shifting electoral odds, Trump's public pronouncements are already moving financial markets. Trump's recent comments about jacking up tariffs on China and requiring Taiwan to pay for U.S. military protection this week triggered a sell-off in semiconductor, AI and other large tech companies, with even star performers like Nvidia taking a tumble.
"People forget that the 2018 tariffs put the U.S. manufacturing sector into a recession, and we've been in another one for the past two years," Peter Boockvar, chief investment officer of Bleakley Financial Group said this week in an email. "Another tariff battle is a bad thing. Another economic fight with the second largest economy is a bad thing."
Still, the market's knee-jerk reaction is likely to be short-lived, according to Wedbush analysts, who expect the tech sector to continue climbing in 2025.
"Our longstanding view navigating Trump politics and the tech sector is the political rhetoric during this political climate and Beltway races will be loud but, ultimately just like our view since 2016, the bark will be way worse than the bite on the U.S./China Cold Tech War fears," they wrote.