Trump’s back for 2024 -- thin US voting margins but higher China risk premium
He's Back
Last night former President Trump announced his bid for the White House, making him the third individual (after Howard Stern and Kanye West) to declare his candidacy officially.
For some, Trump’s return must seem like one of those He’s Back! moments more characteristic of serials featuring leads like Chucky, Jason, Freddy or Ghostface. But for all the harms that Trump’s trade policies imposed on non-US markets (notably EM/China Equities and EM FX), his four years in office coincided with above-average cumulative returns for the S&P500 (70% over his term), compared to a Republican Presidential average of about 30% per term and a Democratic average of 45%. All things considered, Republican tax cuts in late 2017 and bipartisan COVID stimulus rendered his Presidency very equity-positive.
Whatever a possible second Trump term might mean for markets will partly depend on the overall balance of power in Washington. But the more immediate question is whether Trump can win a second term, which no one has done non-consecutively since Grover Cleveland in the late 1800s. No ex-President has attempted a comeback since Teddy Roosevelt in 1912. Maybe there's a lesson in history, whether for the candidate or the electorate, about moving on.
Since these are early days – the outcome of this month’s mid-terms are not even known yet – I limit the analysis below to five indicators worth monitoring over the next two years to assess Trump’s odds and the vulnerability of financial markets (notably for the China complex).
Five polling and valuation indicators to monitor
1)????Trump as the Republican nominee: The Real Clear Politics average puts Trump well ahead of Florida Governor DeSantis (52% to 21%) as of late October. No other polls have been released this month, when a number of Trump-supported candidates failed to win their mid-term contests.
2)????Trump versus Biden for President: There aren’t many national polls this far ahead of the Presidential election, but a recent Wall Street Journal survey placed Trump even with Biden. More numerous state polls, unsurprisingly, place Trump ahead of Biden in Red states but trailing Biden in Blue ones. So on current numbers, this race is a toss-up.
3)????Trump versus Biden on approval ratings: Given that the incumbent’s approval rating correlates closely with re-election prospects, Biden is a weak candidate. His approval rating remains fairly low (44%) compared to previous Presidents around the mid-terms, though he is viewed more favorably than Trump (42%) and VP Kamala Harris (37%). If readers want a wildcard scenario, imagine Biden unable to run for health reasons, and Trump facing an even less-popular Harris. The caveat around translating approval ratings to voting outcomes is that Democrats in general are losing far fewer House seats in the mid-terms than Biden approval rating would have inclined them to surrender (chart 1).
4)???Betting markets on Trump, DeSantis and Biden: PredictIt puts DeSantis in the lead at 32%, versus 29% for Biden and 27% for Trump (chart 2). Consider this indicator to be only a mid-quality one. Betting markets can overpredict low-odds/high payoff outcomes, so are not consistently reliable lead indicators of polling outcomes.
5)???Market valuations: China Equities are record-cheap vs the S&P500 (chart 3). Although this risk premium resulted more from the past year’s China lockdown, property market recession and Common Prosperity policies, it is nonetheless suggestive of investor underweights in this market heading into a volatile US Presidential campaign. The renminbi, however, is very expensive in real trade-weighted terms (chart 4), implying that the currency may be a better hedge eventually for a revival of US-China trade tensions should Trump rise in the polls.
Charts on polls and valuations
Chart 1: Democrats lost/Republicans gained about 20 fewer seats than would have been predicted given Biden low approval rating Change in number of House seats for President’s party at mid-term elections versus President’s approval rating in late October of that year. Data since 1960.
Source: US House of Representatives
Chart 2: Betting odds favor DeSantis over Trump and Biden Betting odds for each candidate to win 2024 Presidential election. Price on right scale, volume on left.
Source: PredictIt
Chart 3: China Equities are much cheaper outright and relative to US now than when the US-China trade war began in 2018 S&P500 vs MSCI China, indexed to 100 in 2011
Source: Y Charts
Chart 4: CNY is one of the most expensive currencies in real effective terms Real effective exchange rate, percent deviation from 30-year average
Source: BIS