From a tax policy point of view, the electoral campaign gave little indication of the measures that Trump would put in place, apart from the abandonment of the latest American green legislation, including the Inflation Reduction Act which assigns hundreds of billion dollars in the form of subsidies for renewable investments. The former American president is a fervent opponent of this regulation and campaigns for a reduction in this aid as well as for the lifting of environmental constraints which weigh on American oil producers.
In addition, the personal tax cuts that were enacted during his presidency, and which end in 2025, will undoubtedly be renewed, subject to Congressional approval. If it is not a question of “new tax expenditures”, it will at least avoid an abrupt fiscal tightening. In the event of Joe Biden’s second term, a tax overhaul will likely be proposed, which will aim to tax the wealthiest more and re-increase the corporate tax rate (which had been lowered under Trump).
Inflation on the rise
It is on the inflation front that Trump 2.0’s policies would undoubtedly have the most effects on the economy and the markets, through two of his flagship proposals. The first is the restriction of immigration. If the number of people active in the American labor market is increasing today, it is also thanks to immigration. Restricting immigration risks increasing inflationary pressures on wages in certain areas of activity.
Second, his proposal to introduce import taxes of 10% on all goods entering American territory (with the exception of Chinese products which would be subject to a 60% tax) is a measure that would increase the imported inflation. Both of these would make it more difficult for the Federal Reserve to bring inflation back to the 2% target. The implication for interest rates is therefore unequivocal: if Trump’s policies lead to higher inflation, this argues for a more restrictive US monetary policy (compared to a baseline scenario), with a beneficial effect for the dollar.
When trade tensions between China and the United States reached their peak in 2018 and the first part of 2019, the dollar appreciated, which offset – albeit partially – the additional cost borne by American importers resulting from import taxes. In the event of universal import taxes on Chinese goods, China would no longer strive to maintain a certain stability in the exchange rate of the renminbi and would favor a depreciation of its currency to cushion the negative effect of American taxes on its exporting companies.
Restricting immigration and introducing import taxes will therefore have a positive effect on the dollar, at least as long as the president does not hinder the independence of the American central bank. Indeed, the risk is not zero that Donald Trump, if he is re-elected, will put pressure on monetary decision-makers so that they do not react to a possible rise in prices. In the event that inflation increases without generating a response from the Fed, the dollar would depreciate.
Gold on the decline
From a geopolitical perspective, the former US president said that if he won, he would end the conflict in Ukraine overnight. This would have significant repercussions on the price of gold which currently includes a high premium linked to geopolitical risk. If a peace deal is reached in Ukraine, it is likely that the price of gold will react negatively due to the deflation of this geopolitical risk premium. Indeed, the price of gold has disconnected from its past inverse relationship with US long rates since spring 2022.
Since then, the price of gold has reached historic highs despite rising long-term interest rates. Besides this geopolitical factor, other elements linked to demand can explain the recent rise in the price of gold. Among these, note the speculation of Chinese individuals and the purchase of gold by emerging central banks, and in particular China, which aims to diversify the allocation of its foreign exchange reserves to the detriment of American treasury bonds.
US stocks boosted
The last aspect is the “Trump” effect on the stock markets. Trump’s foreign policy and his “America First” motto will likely lead to better stock market performance for U.S. stocks relative to international stocks, all else being equal. Its threat to leave NATO will push investors to require an additional risk premium to hold European assets, while emerging countries will suffer the harmful effects of customs duties.
However, it is appropriate to recall that the corporate and household tax cuts that were implemented during his first term had supported the price of American stocks. It is doubtful whether these same policies can be implemented again given the fragile fiscal situation of the United States, which is the legacy of past tax cuts and the massive fiscal response during the pandemic.
To conclude, if Trump overcomes all the electoral obstacles he faces, wins a second term and stays true to his statements, economic policies will be potentially inflationary, which should benefit the US dollar. Long-term bond yields are likely to rise, and his isolationist foreign policy will likely be a negative for the performance of international stocks relative to U.S. stocks. That being said, the appreciation of the dollar and the rise in US interest rates that would result from his policies should also have an impact on US stocks.
