IT Disruptions and Biden Drops Out
What happened last week?
It was the worst week for the S&P 500 in three months. A botched software upgrade by cyber firm CrowdStrike Holdings, Inc. on Friday crashed Microsoft Windows computer systems around the world.
The outage impacted airlines, banks, healthcare, and other industries and the fix involved manually rebooting.
Elsewhere, days after an assassination attempt on his life, former President Trump became the Republican Presidential nominee, and he named Senator JD Vance (Ohio) as his running-mate.
On Sunday, President Biden dropped out of the Presidential race, throwing his weight behind Vice President Kamala Harris.
3 Things to Know
After Events, Trump Leads in White House Race
According to PredictIt, the chances of Republican candidate and former President Donald Trump taking back the keys to the White House rose from 45% as recently as April 26 to as high as 69% on July 15 before President Biden exited the race.
Trump’s chances stand at 61% today. While other factors beyond politics — the trajectory for the economy, profits, central bank policy, and trends in AI — will arguably matter more to market performance in 2025, election themes are likely to dominate the market narrative over the next few months.
US SMIDs, Cyclicals Led in Response
To assess the market’s views, we analyzed the specific reactions in the trading sessions immediately following the June Presidential debate and the assassination attempt. Both days saw similar market reactions, with US small caps, banks, and energy shares perceived as winners while Chinese equities, clean energy and utilities stocks underperformed.
Banks and traditional energy stand to potentially benefit from potential deregulation of their respective industries. US banks currently face the prospects of much higher capital requirements to align with Basel III global standards, but these rules could get watered down in a Republican administration (Federal Reserve officials have already suggested changes were to come).
Meanwhile, Trump has promised to reduce red tape when it comes to new oil and gas projects in the US.
Domestically-oriented small cap stocks could benefit from a pro-business administration. They also could be more insulated from a potential trade war than larger multinationals, including retaliation to tariff steps by the US.
Turning to the biggest potential losers, investors remain cautious about the outlook for Chinese equities. While the Chinese equity sell off last week was in part driven by concerns about weaker domestic data, China is also likely to face the brunt of Trump’s trade policy.
Candidate Trump has vowed to place 60% tariffs on all Chinese imports to the US if elected. At the sector level, rising odds of a “red sweep” have also put pressure on stocks tied to renewable energy, with clean energy shares down 4% following the attack on Trump.
Republicans have vowed to repeal the Inflation Reduction Act, which despite its name mostly provided subsidies for clean energy projects.
Treasury Yield Curve Steepens; Tax Cut Prospects Increase
The Republican Party’s agenda may include very broad shifts in policy that could also potentially impact the fixed income market.
First, domestic economic policy is likely to be viewed as highly “protectionist” and potentially inflationary in multiple ways, assuming it largely conforms to the platform adopted this week at the Republican convention, and that Republicans win both houses of Congress.
Importantly, tax cuts enacted in 2017 are set to expire at end 2025. The Congressional Budget Office has estimated that a permanent extension of the lower Federal Income tax rates and other measures would add over US$4 trillion to budget deficit estimates over the next decade, more than a 10% increase over current debt levels. Candidate Trump wants further tax cuts and other measures (e.g., no taxes on “tips”).
Another policy push may be that the new Administration tries to actively weaken the dollar. While there are too many hypothetical policy shifts in this respect to analyze (for example, a tax on financial flows into the US), the broad thrust of this policy mix would be to encourage reshoring of manufacturing and increase American exports.
See our weekly CIO Strategy Bulletin for more details