Everyone’s talking about the Trump trade, with investors and analysts debating what stocks might shine or suffer under a second Trump presidency. However, such predictions should be taken with the proverbial grain of salt.
Firstly, Trump may not actually win November’s election. Yes, the current Democrat disarray following Joe Biden’s disastrous debate performance, coupled with Trump’s defiant reaction to a near-miss assassination attempt, means he is rightly the favourite, with prediction markets indicating he has a 65 per cent chance of winning. However, 65 per cent is not 100 per cent, and much could happen between now and November. As Bloomberg’s John Authers puts it, a Trump victory should be regarded as the base case but not a done deal.
Secondly, how much is already priced into stocks that may benefit from Trump policies? For example, some analysts suggest European defence stocks may benefit due to Trump’s anti-Nato leanings and Europe’s consequent need to up defence spending, but the main gauge of European aerospace and defence stocks is already up 40 per cent over the past year and has nearly doubled since Russia’s invasion of Ukraine in February 2022.
Thirdly, looking at past presidencies Morningstar strategist Dan Lefkovitz has noted that in November 2016, following Trump’s shock victory over Hillary Clinton, investors ploughed into perceived winners like small-cap US stocks and out of big tech. However, that same small-cap sector was the worst performer in 2017, while technology was the best performing sector during Trump’s presidency.
Similarly, there was much talk of green stocks outperforming during Biden’s presidency. In fact, the oil-heavy energy sector has been easily the biggest winner. Market fluctuations are influenced by a complex interplay of factors, of which elections are but one. Election-related investment predictions should be approached with a healthy dose of scepticism.
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