What Trump may have in store for the US economy

With the November presidential election approaching in the US and Donald Trump and the Republicans now ahead in the polls, we have to take the prospect of a Trump victory seriously.

What once seemed like the Democrats’ election to lose now seems increasingly unwinnable. Joe Biden’s approval ratings have sunk to record lows, despite a strong US economy, buoyant employment, falling inflation and rising consumer confidence.

So, what can the business world expect if Trump takes over? In particular, he has been vociferous in wanting to remove the US Fed chairman, Jerome Powell, blaming him for keeping interest rates too high for too long.

This comes as no surprise. Trump wants to further politicise the Fed as part of his desire to assert autocratic power over state institutions. He also likes short-term gains and thus high deficits and low interest rates.

One other intriguing factor gives us confidence that this is likely to happen. Trump historically operates with an eye on the interests of the Trump Organization, which has recently been fined $454m (£362m) for overstating property assets to support borrowing.

In July 2022, a Forbes investigation estimated this borrowing at $ 1.1bn, with most of the sum due in 2028.

This gives Trump a strong motivation to get the Fed to cut rates.

Record deficits and interest rate cuts – even as there is every sign that inflation does not want to lie down and go to sleep around the Fed’s long-term target rate of 2pc – implies a weaker dollar, a strong economy and rising inflation. We are also confident that Trump will raise tariffs. In his first term, this was the big policy change he followed through on as so many other promises fell by the wayside.

The Biden administration did not reduce Trump’s tariffs and now he is proposing surprising increases, particularly on China.

Trump has also been talking about the unfair duopoly of Airbus and Boeing, linking subsidies for Airbus with Europe not pulling its weight in defence spending, and saying he will be levelling up this playing field.

Stockholdings in industries will benefit from this protection, and the large deficit spending from the Inflation Reduction Act which will stay in place. We also know that Trump wants to return to “drill, baby drill”, using that expression from the fracking boom to provoke environmentalists.

This means that the world’s biggest oil producer, the US, will pull further ahead of Russia, the number two, and Saudi Arabia, the number three.

Putting all of this together, the US beneficiaries are small- cap and value stocks, particularly in the consumer cyclical, industrial and commodity areas. Such a spend-and-boom policy would stoke up inflation, which benefits value sectors relative to high multiple growth stocks.

Given the large valuation gap between the two sectors, this would be the rationale for the value rebound.

As the world’s stock markets are connected, and small and value are cheap everywhere, we expect them all to do better after a Trump victory.