Investors step up plans for the 'Trump trade'

The last few weeks have seen Republican challenger Donald Trump pull ahead of incumbent Joe Biden in the polls ahead of November’s US presidential election. While President Biden, 81, has been fending off concerns about his age, former president Trump, 78, has dominated the news cycle following a failed assassination attempt. 

“The market now seems to be increasingly pricing in a Trump win in November, with investors anticipating that a lower tax, lower regulation, pro-business administration will emerge,” says Mark Sherlock, Head of US Equities at Federated Hermes Limited.

The shift in sentiment towards the possibility of a Republican victory may have helped spur a dramatic surge in the Russell 2000 Index of small-cap stocks, which jumped more than 11% in the five days between July 9 and 16. Many companies on the index are domestically focused and could benefit from trade tariffs. 

“Small and mid-cap stocks have caught a bid this last week, notching up their strongest five-day gains in months,” Sherlock says, adding that there may also be a bit of investor fatigue about the mega-cap tech/artificial intelligence trade. “Whether this is a knee-jerk reaction to the flurry of recent Republican announcements, or the start of a more meaningful rotation, will become evident as the summer progresses,” he adds. 

Inflation risks

At the Republican National Convention in Milwaukee, Wisconsin, this week, Trump announced Ohio senator JD Vance as his running mate for vice president. “The decision may prove a missed opportunity to broaden the presidential candidate’s appeal to a more diverse group of voters, or it may be a further sign of Trump’s confidence in his existing policies and appeal,” Sherlock says. 

President Biden, meanwhile, has faced further questions about his candidacy amid growing dissent among top Democrats following his poor performance in last month’s presidential debate. 

There is a general consensus among investors that a Trump presidency 2.0 would prove inflationary on the back of a rise in trade tariffs as well as a crackdown on immigration.

“The Republicans have campaigned on increased tariffs, limits on immigration and new or extended tax cuts which could impact business investment, job market growth and the size of the US budget deficit,” says Robert Ostrowski, Chief Investment Officer for Global Fixed Income Group at Federated Hermes. “All are potentially disruptive in terms of inflation, financial conditions, the yield curve and policy required by the US Federal Reserve. The current direction and leadership of the Fed could be on the table as well.”

Planning policy

In other news this week, the UK’s new Labour government set out its policy priorities in the King’s Speech in the House of Lords, which marks the start of the parliamentary year. The speech outlined 39 bills that minsters want to pass in the next parliamentary session covering a raft of areas including housing and planning, energy and infrastructure and transport. 

“We welcome the new government’s commitment to adopting a more holistic approach to tackling the chronic shortage of housing. Delivering new sustainable communities will require long term strategic planning, with infrastructure provision key to ensuring both environmental and societal outcomes are met,” says Chris Taylor, Head of Real Estate at Federated Hermes. 

“The build-to-rent sector will play a vital role in delivering accessible housing for all by meeting demographic lifestyle changes and addressing affordability issues. However, much-needed, long-term, institutional capital needs to be attracted to this dynamic sector. It will be important not to repeat the mistakes made in cities such as New York and Berlin where investors have been deterred by recent changes in taxation.”