The Great Economic Debate: Stocks, Bonds, and the U.S. Elections

So, here’s the scoop: the stock market seems to be rooting for Trump, while the bond market has its sights set on Harris. There’s a story floating around that inflation is a thing of the past, with rate cuts expected until the end of 2025, leading to a bright future for bonds of all kinds. Sure, that narrative has been tweaked a bit recently, but the idea of short- and medium-term rates dropping significantly while long-term rates only inch down — or maybe even hold steady — still dominates the big banks’ forecasts for next year.

But hold on! Alongside this usual soft-landing tale, we’re hearing buzz about a “no landing” scenario, followed by a fresh take on a potential inflation comeback by 2025. It’s no wonder the markets are feeling a bit jittery!

The “no landing” narrative gets support from the macro data. Why think about a soft landing when the U.S. economy is cruising at a comfy 3.4% growth (thanks, Atlanta Fed’s latest Nowcast)? On the flip side, inflation recovery seems linked to strong growth, and some commentators are linking a possible Trump victory to an uptick of one or two percentage points in inflation. Suddenly, that ten-year Treasury, once thought to be heading toward 3% or lower, is now on a shaky path back toward that 5% mark from a year ago!

With polls showing a tight race and markets sensing a potential Republican victory in Congress, it’s worth taking a closer look at Trump’s agenda and its inflationary impact.

Why should we worry about “Trumpflation”? There are three key reasons. First up, hefty tariffs of 60% on Chinese goods and 10% on everything else. Next, Trump is all about slashing immigration, possibly bringing it down to a million a year, back to his first-term numbers. Finally, he wants to extend those 2017 tax cuts, which the Democrats would let expire in 2027.

Let’s break this down. Are those tariffs a sure thing? Not quite. Trump loves the idea, but it’s more about pressure than actual trade policy. To get what he wants, he’ll need to keep his opponents guessing. Picture Trump entering negotiations with a flair for the dramatic — he’s got the gun on the table, but he might just put it away for the right deal, like encouraging Chinese investments in the U.S. or getting Europe to up its military spending.

If those tariffs do come into play, remember a few things: America isn’t super open economically — imports are just 15% of GDP, with Chinese imports making up 16% of that. Plus, any tariffs would roll out gradually, not all at once. If he goes for a broad approach, he’ll need Congress’s approval, which might be tricky unless the Republicans sweep the elections.

Sure, tariffs could give a short-term inflation jolt, but they might not mess with monetary policy in the long run. After all, we’ve seen VAT tweaks around the globe — those hikes often have one-time effects and can even help ease inflation down the line.

Now, onto immigration: if Trump brings it back to a million per year, and the economy keeps humming along, we might see wage pressures rise. However, fewer immigrants could actually lead to lower rents and housing costs, which are currently pushing inflation higher.

As for renewing those 2017 tax cuts, that would likely mean a stagnant deficit instead of an increase in inflation.

On the flip side, Trump’s agenda also has some deflationary elements, like major deregulation — much bolder than in his first term — and careful cost-cutting measures that could yield results. Just look at how Musk slashed costs at SpaceX compared to NASA!

All said and done, when the market opens on November 5, bonds will likely lean towards Harris for less volatility in the short term. But no matter who wins, it seems unlikely we’ll see those ten-year Treasuries drop back to 3.60% from October. We might be looking at 4% with Harris and 4.50% with Trump. Meanwhile, Europe, with its sluggish growth and dropping inflation, won’t be caught up in the American rate drama.

As for stocks, they’re ready to cheer for Trump (just like crypto!). Deregulation, tax cuts, tariffs, and rising inflation are all positive vibes for the U.S. stock market. But don’t forget, it might hit the brakes a bit with a bond market that’s getting a bit feisty, especially if Trump’s back in charge!