The apparent coronation of vice president Kamala Harris as the Democratic nominee after incumbent Joe Biden’s exit from the presidential race has had a relatively mild market impact thus far.

While the recent ‘Trump trade’, with investors expecting renewed inflationary pressure, a worsened fiscal situation and higher corporate profits if America’s 45th president gets another crack as commander-in-chief, has unwound slightly, there is an obvious preference for adopting a ‘wait and see’ position until it becomes clear what impact these latest events might have on the race.

The assassination attempt on Trump, coming in the wake of Joe Biden’s disastrous performance in a head-to-head debate at the end of June, had lent credence to a narrative that the Republicans might achieve a sweep of both houses of Congress as well as the White House.

Given Trump’s legislative programme is expected to include new tariffs and tax cuts, it is understandable this prompted an increase in yields on US government debt and the dollar (in anticipation the Federal Reserve might have to return to rate hikes again down the line).

Even if Harris isn’t able to prevail over her opponent, if Biden’s exit helps the Democrats retain the Senate, then, as ING observes, ‘Trump will be forced to make concessions on key policy areas and his efforts to enact additional tax cuts and major immigration controls may be scuppered’.

The problem for the market is the pretty much unprecedented nature of this election – with Biden stepping away at a relatively late stage and Trump an unpredictable actor in both domestic and foreign affairs – means there could be a lot of noise without too much clarity on what the outcome will be in November for weeks and months to come.

Erik Knutzen, chief investment officer, multi-asset, at investment manager Neuberger Berman, notes there has been a ‘historic’ rotation into US small caps since 11 July with the small- and mid-cap Russell 2000 index leaving its large cap counterparts for dust.

‘While it is too soon to assess the implications of the latest developments, the uncertainty around the current situation is, in many ways, consistent with key themes we have been articulating so far this year.

‘We have recently talked about how the unpredictability of the political scene might be a paradoxical cause of the current low market volatility, and have already warned that volatility seemed unsustainably muted, and that investors should prepare for it to rise as the US election came closer.’ 

‹ Previous2024-07-25Next ›