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- S&P 500 and NASDAQ futures were in the green on Monday morning following the Biden announcement
- Those for Dow Jones and the Russell 2000 smallcap index are in the red
- Wall Street historically doesn’t really care who’s in charge, as long as nobody introduces red tape
- Trump is well known for being small government in nature but his plan to introduce tariffs on all imports – and higher tariffs for Chinese products – has some economists worried
- The only real certainty under Trump is that energy stocks are likely to prevail; Harris remains unclear
You’ve heard the news: Joe Biden, current US President, has agreed to drop out of the 2024 Presidential election following internal disagreement.
His VP Kamala Harris is almost guaranteed to replace him on the ballot in November. So how might markets respond in the US, at home, and abroad?
The first big thing to note is that US market futures are mixed on Monday afternoon Sydney time ahead of the American overnight session – but Wall Street’s modern powerhouse indexes are tipped to keep rising.
Futures for the S&P 500 and NASDAQ are up +4.25p and +31.6p respectively on an implied open basis as at 12.15pm AEST. We’ve seen both hit dozens of all time highs this year in a historic rally seen by many as the first true post-COVID year.
So, from the outset, business as usual.
Mixed data in confusing times
However, while the Dow Jones is also green at the time of writing, the Russell 2000 smallcap index is flattish red.
The Russell 2000 and Dow have both rallied in the last fortnight following US inflation data coming in at 3% headline, hitting the top of the Fed’s target band. In turn, markets have baked in a 100% chance of a September rate cut from the Fed.
This makes it hard to tell what’s being driven by economics and what’s being driven by politics when it comes to trading behaviour broadly.
In the background, we’ve been hearing a lot about the “Trump trade” – a still-not-entirely-agreed-upon term that intends to capture the sorts of sectors and companies that surged during the last Trump Presidency and those which might surge again.
Probably the most important thing to know about the “Trump trade” is that it includes crypto grandfather Bitcoin – which has, indeed, responded well to multiple recent events ultimately pointing towards a Trump win. But beyond that, it all gets a bit unclear.
The fact that bitcoin is part of the Trump trade is, in my view, evidence of an inherent volatility and ultimately confused sentiment ecosystem.
Also baffling to me is that explanations of the “Trump trade” typically exclude energy stocks when one tries to describe what it means, despite the energy sector being the only sector with any real certainty around it when it comes to a potential Trump re-election.
After all, “drill baby drill” has been one of his 2024 mottos – despite the US already drilling more than it ever has before.
Another thing worth noting: many economists are very concerned Trump could actually put a 60% tariff on Chinese imports, which would make everything from T-shirts to car parts more expensive, likely re-inflating prices.
Too early to tell
Right now, it’s quite hard to tell who’s responding to politics and who’s responding to economy. It probably won’t be easy to tell for weeks.
China’s failure to stimulate excitement at its Third Plenum last week has also helped to tank copper and we’re still in the early days of both that post-conference gloom, and whatever this week will hold with a regards to the intersection between Washington and Wall Street.
That’s not considering the intersection between China and Washington, and China and Trump, and China and Harris – a theme that you’ll continue to hear about all year. While the ASX responds to US sentiment, it will be the real economics of China in response to US policy in 2025 that really starts to shape Australia’s fundamentals, if you will.
But let’s turn back to the Russell 2000, which saw massive inflows following the 3% inflation read. That read was widely seen as a confirmation a Fed cut is soon to happen, and so many felt confident enough to leave the safe harbour of Mag7 stocks.
While some had attributed the recent surge of investment in Russell 2000 smallcap stocks to Trump, there’s also the economic catalyst that US inflation hit 3%; a rate cut now seems definite, and so it’s risk-on hereafter. This is where it’s difficult to tell what’s really going on – and finance is difficult in that multiple conflicting truths are often all equally accurate at once.
That there was a rotation into Russell 2000, however, is exemplified by large losses incurred by Mag7 companies last week. That isn’t a matter of narrative.
Whether or not futures sentiment will continue to see the Russell stay red ahead of the Monday night session remains to be seen.
The ASX200 was down on Monday but futures had largely baked in a red Monday following one of Wall Street’s worst weeks ending Friday 19th US time – we weren’t red on Monday because of the US, despite what might seem a seductive narrative to some.
How did we get here?
Biden’s decision to drop out comes about a fortnight after a TV debate with Trump widely seen as disastrous for blue voters, in which Biden had multiple senior moments, the worst of which was when he said the Democrats had ‘beat Medicare.’
That was the final nail in the coffin for many who had long questioned Joe Biden’s mental capacity. While much of the old age rhetoric was unfair in his early years, there’s definitely been a degradation palpable in Joe Biden over the last 12 months.
It goes without saying that Kamala Harris is probably going to replace him on the ballot.
Whether she can overtake the Trump revival – freshly rejuvenated by an assassination attempt – remains to be seen, but also feels unlikely to most, if polls and punter expectations are anything to go by. (Don’t forget polls failed to predict the 2016 result.)
Ultimately, there’s only one real certainty: if Trump wins, the energy sector will benefit. Drill, baby, drill.
As for Harris? Too early to tell.
