Donald Trump has had a surprisingly strong summer, which, for now, increases the chances that he will win a second term.
This is why financial markets are waking up to the “Trump trade,” with diverse implications for stocks, bonds, cryptocurrencies, interest rates and inflation.
Trump’s surge in popularity began with the June 27 presidential debate, in which President Joe Biden’s blunders raised more questions than ever about the incumbent’s age and stamina. Since then, a growing number of Democrats have called on Biden to step aside and let Vice President Kamala Harris or another younger Democrat take on Trump.
Trump survived an assassination attempt on July 13 and nominated the first millennial to a national ticket by choosing J.D. Vance as his vice presidential running mate. Former Trump adversaries lined up behind the former president at the Republican convention, an unusual show of unity in an otherwise divided party.
Trump himself appears to be moving toward the center, perhaps in an effort to win over swing voters and business supporters. In an interview with Bloomberg Businessweek, he sought to allay Wall Street fears about a chaotic second term. He said he would likely keep Fed Chairman Jerome Powell in his job through the end of his term in 2026, “especially if I thought he was doing the right thing.” That means he would have to cut interest rates, but only during Trump’s presidency, not in the fall, when that could help Biden.
Trump has tried to reassure investors that the new tariffs would not cause unusual inflation, without explaining how he plans to do so. He has even suggested that he would consider appointing Jamie Dimon, CEO of JPMorgan Chase, as Treasury secretary, which would put a Wall Street figure in the job, if Dimon accepts.
Election scenarios are now pushing earnings and inflation out of investors’ top concerns. “Animal spirits have taken on a whole new dimension because of the growing sense that Donald Trump is going to win,” economist David Rosenberg of Rosenberg Research wrote to clients on July 17. “No wonder investors are frothing with rage.”
Betting markets, which can be misleading, now give Trump a 66% chance of winning, according to the RealClearPolitics average. That suggests an increased chance not just of a Trump victory, but of a Republican landslide in which the GOP also wins both houses of Congress, giving it unified control of government.
That would pave the way for further corporate tax cuts, which Democrats would likely block if they controlled at least one chamber of Congress. Rosenberg sees the Republican wave scenario as contributing to the recent rotation of investors out of tech stocks and into smaller, value stocks, on the theory that further tax cuts would help smaller stocks catch up in value to the Magnificent Seven.
Cryptocurrencies have also benefited from Trump’s rise in wealth. Trump, once skeptical of cryptocurrencies, has vowed to end government efforts to regulate cryptocurrencies in an effort to appeal to young voters who are drawn to the trend. Bitcoin surged $1,000 in value in the first hour after Trump survived the July 13 shooting, as buyers bet that the failed assassination would boost Trump’s chances of being elected. Over the next four days, bitcoin rose another $4,500. Most other cryptocurrencies followed bitcoin.
But the prospects for a second Trump presidency are not entirely optimistic.
For example, Trump’s plans to raise import tariffs and deport undocumented immigrants from the country are both inflationary, because they would raise the prices of imported goods and likely also increase labor costs by making workers scarcer in some sectors.
That could reverse the considerable progress of the past two years, with inflation falling sharply from its 2022 peak, raising hopes that the Federal Reserve could begin cutting interest rates as early as September. Any signs of a resurgence in inflation — including possible measures by Trump — could interfere with that and keep interest rates elevated. Some analysts believe that interest rates are already higher than they would otherwise be because investors are starting to price in the effect of Trump’s inflationary policies.
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Investors are also looking for specific sectors or companies that could benefit or suffer from a second Trump term. In the Bloomberg interview, for example, Trump suggested he would not help Taiwan if China attacked, even though Taiwan is a key source of the world’s most advanced semiconductors, which are critical to the U.S. economy and the rise of artificial intelligence. Or, he said, Taiwan should pay the U.S. for protection.
Technology stocks fell quickly, leading the Nasdaq stock index to a 2.5% drop on July 17. “Some of the pressure on big tech stocks today appears to be related to Trump’s remarks that Taiwan should fund U.S. defense,” Capital Economics reported on July 17, the day Bloomberg published Trump’s interview. Shares of TSMC, the Taiwanese semiconductor giant, fell 7% on the news.
Even if he runs a good campaign, Trump is not guaranteed to be elected.
Despite all of Biden’s misfortunes, he is within three points of Trump in the Cook Political Report’s polling average.
And an already unpredictable race could get even more complicated. Biden could always step aside and be replaced by a less familiar Democrat. Trump is also scheduled to be convicted of 34 felonies in New York’s fraud trial on Sept. 18, just six weeks before the election. And both candidates are old and frail in their own ways, raising the risk of a health emergency in the final stretch of the election.
Whatever prices the markets set today, they could reverse tomorrow.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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