There is a real possibility that former President Donald Trump will take back the White House in November, according to the latest polls.
So it’s worth asking: What impact might a second Trump term have on stocks? Tom Essaye, publisher of Sevens Report Research, recently shared his expectations for which segments of the stock market could outperform, and which could struggle, if Trump triumphs in an expected election rematch with President Joe Biden.
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American stocks would outperform their international counterparts
Another Trump term would likely result in four years of outperformance for U.S. stocks relative to their international counterparts.
Trump has made clear his intention to double down on his international trade policy if elected, which would likely mean raising tariffs on imports from China – and elsewhere. He has threatened to impose 60% tariffs on all Chinese goods entering the United States, while critics say he habitually misrepresents the tariffs as being borne by the country of origin of the goods. .
“Clearly, these policies would be negative for Chinese stocks and for emerging markets in general, because they would increase trade tensions,” Essaye said.
As a result, investors can expect Chinese stocks, and emerging markets more broadly, to struggle, as they did during Trump’s first term and, relative to the United States, for a much of the last 15 years.
Between January 2017 and January 2021, the iShares MSCI China ETF
FXI
returned just 12.6%, compared to a total return of 37% for the S&P 500. The iShares MSCI Emerging Markets Index
ESEE
reported 10.5%.
Developed market stocks would also likely lag behind their U.S. counterparts. As he did during his 2016 presidential bid, Trump said he would make eliminating the U.S. trade deficit a top policy priority, and to do so he threatened to impose tariffs. Basic customs duty of 10% on all imports.
If Trump wins the presidential election in November, the iShares MSCI All Country World Index ex-US ETF
ACWX
would likely lag the S&P 500, as was the case during his 2017-2021 tenure. This index tracks the performance of 22 developed markets.
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Bet against clean energy stocks – but favorable treatment may not be enough to boost oil and gas
Clean energy stocks performed well during Trump’s first term after policies intended to punish green energy never came to fruition, but this time around, Trump pledged to repeal the law on reducing inflation and other Biden-era policies that benefited green energy and electricity. car manufacturers.
This would make a repeat of the Invesco WilderHill Clean Energy ETF
PBW
Outperformance during Trump’s first term is unlikely, Essaye said. The fund grew more than 53% during Trump’s four years in office.
At the same time, Trump would likely work to increase U.S. oil and gas production. Unfortunately, as evidenced by the stock market performance of the energy sector during Trump’s tenure, higher production does not necessarily translate into higher stock prices.
Select Energy Sector SPDR Fund
XLE
only grew 3.6% during the Trump years. Likewise, poor performance during a second Trump presidency cannot be ruled out, Essaye said.
Defense Stocks Would Likely Thrive
Trump was supportive of the defense sector during his first term, and stocks of major military contractors responded accordingly by rising more than 40% during his term, outperforming the S&P 500.
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Investors can expect this dynamic to repeat itself if Trump ends up in the West Wing again, Essaye said.
Despite the outbreak of war in Gaza and the ongoing conflict in Ukraine, the iShares US Aerospace and Defense ETF
ITA
has underperformed the S&P 500 over the past year, returning around 10% with dividends reinvested, compared to more than 27% for the benchmark.
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Bank stocks could also benefit
Stocks of U.S.-listed banks lagged during Trump’s first term, despite a relaxation of Dodd-Frank rules under the Trump administration, which included raising the threshold for what is considered a systemically important financial institution, colloquially known as too big to fail. bank.
If he wins another term, Trump has said he would reject the increased capital requirements of Basel III. This would likely help banks increase their profits by allowing them to hold less of their capital in reserve for their loan portfolios.
At the same time, Trump said he would likely replace Federal Reserve Chairman Jerome Powell, whom Trump chose to chair the central bank in 2017, when his term expires in two years. That would likely result in a more dovish approach to monetary policy from the Fed, putting downward pressure on long-term interest rates, Essaye said. This should, at least in theory, help boost demand for bank loans.
All of this adds up to a bullish outlook for bank stocks during a second Trump term, Essaye said.
The SPDR Bank ETF
KBE
and SPDR ETFs from regional banks
KRE
reported 14% and 11.7% respectively between January 2017 and January 2021, according to Essaye.
Whatever happens, investors can expect some volatility around the vote. Demand for portfolio hedges that would cover the Nov. 5 election is already rising, driving up the cost of futures contracts tied to the Cboe Volatility Index.
VIX
expiring in October.
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