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Donald Trump’s Potential Second Term and its Market Implications

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Recent victories in the Iowa caucuses and the New Hampshire primary, combined with a substantial lead in South Carolina, indicate that Donald Trump could potentially secure the Republican presidential nomination. In fact, some betting sites suggest that his chances of becoming president again are almost as good as a coin flip.

However, strategists at UBS in London caution against merely projecting Trump’s first term onto a potential second term. They argue that investors may be overlooking important differences between the two periods and underestimating the current economic and market landscape.

Comparing the performance of the S&P 500 during different presidencies, it becomes evident that the first three years of Trump yielded a gain of 41.5%, whereas the same period under Barack Obama saw a higher increase of 58.9%. In contrast, thirty six months into Joe Biden’s presidency, the S&P 500 has gained 31%. These figures challenge the assumption that a Trump victory would automatically lead to a bullish equity market.

The UBS team attributes this disparity not so much to an assessment of Trump’s policies, but rather to the unique conditions of the current market and economy. They point out that the economy is now in a much later cycle, with limited fiscal capacity and potentially less patience in the bond market. Furthermore, earnings expectations are higher, and risk premia are already tighter. All of these factors set a different starting point for the potential second Trump term.

To illustrate their point, the UBS team provides a chart depicting various factors and their differences in the present context compared to previous periods.

Regarding policies, UBS anticipates a partial extension of Trump’s 2017 tax cuts. However, they note that a complete extension would result in an increase in marketable debt to GDP.

In terms of market response, UBS suggests that initially, financial markets would favor a Republican sweep of both the presidency and Congress. However, over time, some of these gains would likely be retraced, resulting in an average 6% gain over 12 months. On the other hand, Democratic sweeps tend to yield smaller three-month gains but more favorable 12-month results.

It is important for investors to recognize the distinctive elements of a potential second Trump term and not rely solely on previous experiences. The current state of the economy, equity markets, and risk premia indicates that a different approach may be necessary to navigate the potential implications of another Trump presidency.

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