Trump’s pick of James David Vance, better known as J.D. Vance, as vice-presidential candidate markets a firm shift. Vance’s appeal in swing states and manufacturing focus could reshape the economy and ensure a Republican stronghold, impacting market dynamics significantly.
Coincidentally, prior to the 2016 US presidential election, I read J.D. Vance’s book titled Hillbilly Elegy. That book was tipped in a Financial Times column. In Hillbilly Elegy, Vance tells how he escaped a hopeless childhood, coming from a poor Middletown Ohio family, leaving for Yale and ending up at Peter Thiel, the founder of Paypal that later merged with Elon Musk’s x.com, via his work as a lawyer in San Francisco. He was then helped into office by Thiel and Trump as an Ohio senator. Above all, the book gives a good picture of which people voted for Trump in 2016 and why these people still support him.
Given his background, J.D. Vance would be the ideal candidate for the Democrats. He turns 40 next month, meaning he was too young to be vice president five years ago. Vance will also be Trump’s obvious successor. This is Trump’s last term and with Vance, the Trumpists have completely taken over power in the Republican party.
Vance’s book has now been filmed, making him a well-known American who can attract additional votes. Especially in key blue collar swing states like Michigan and Pennsylvania, he can be the deciding factor. Vance can also ensure that the US Congress is the same colour as the president.
New reality
In short order, the stock market must now adjust to this new reality. And the market has more good news to digest. First, the Federal Reserve’s announcement that, starting as early as September, the Fed will probably use every FOMC meeting until mid-2025 to cut interest rates. That gives room for other central banks, including the ECB, to also cut interest rates further. This further reduces the likelihood of a recession.
Then the greatly increased likelihood of Trump’s second term. Added to this is J.D. Vance’s bid to boost manufacturing businesses in the United States. The Republicans are flaunting hefty import tariffs, but ultimately these act as a tax increase for US consumers. There may be concerted action to weaken the dollar.
Meanwhile, Trump has indicated that he is leaving Powell in place, although political interference in monetary policy has increased sharply under Trump. The risk is that Trump’s expansionary economic policy and Powell’s simultaneously restrictive monetary policy will ensure a strong dollar. Interim intervention by Trump cannot therefore be ruled out. The world could do with a weaker dollar, as now currencies like renminbi and yen are clearly undervalued, where the US dollar is clearly overpriced. This creates imbalances that can only be resolved with help from the Americans.
A little too much good news
The combination of certainty about upcoming interest rate cuts and certainty about the next US president was just a little too much good news for the stock market. Indeed, along with diminishing chances of a recession and rising corporate profits, this means there is less need for a safe haven.
In the past, long-term US Treasuries were one such safe haven, but after a halving of prices in recent years and potentially further rising interest rates, the market has started looking for other safe havens. “Stashing cash” in an account at a regional bank proved not to be the solution, hence there is now a record amount in US money market funds.
However, many foreign investors opted for another safe haven and that is the Magnificent Seven. While the future with regard to Treasuries is unclear, the market assumes that shares of Microsoft, Apple and Google will eventually do well.
Structural losses
With less need for such a safe haven, investors are selling their positions in the Magnificent Seven and daring to take more risk by investing in stocks of companies that are fundamentally weaker. In itself, this is not a bad thing, as widening the market provides more stability. However, the market is trotting along, as the biggest risers last week were shares of companies that are structurally running at a loss, to even companies that could go bankrupt in the short term.
This is not uncommon. Even after the Great Financial Crisis, the Fed’s intervention allowed shares of companies that were in extremely bad shape to triple in a short time. The phenomenon is known as a junk rally or a crap rally. This time, lower interest rates will have to ensure that these zombie companies, among others, stay alive and therefore the price can suddenly go up.
Many active investors would not easily select such loss-making companies with a lot of debt, but are now forced to do so by momentum. The big question is how long these investors stay put, as they must have a strong stomach to weather the still difficult fundamental development. Better they should then choose the sectors that benefit from a Republican majority in Congress, with Trump as president and J.D. Vance as his successor.
Cryptocurrency
These are energy (fossil), industrials & services and financials. Even bitcoin benefits from Trump’s arrival, as he says strict regulation around cryptocurrencies is un-American. Electric cars, too, are un-American, according to Trump. In that respect, Elon Musk’s big support seems a bit odd, but Tesla can probably handle the end of green subsidies better than many other carmakers.
Of course, it is still 15 weeks until the US election. In elections, that’s a long period of time. Moreover, with Biden’s exit, a new Democratic nominee must be chosen at the Democratic convention starting on 19 August. Biden’s nominee Kamala Harris is also not doing well in the polls, but she should still be able to outperform Biden. If the Democrats are united, they may still have a chance, but the stock market has its cards on Trump, and of course J.D. Vance, for now.
Han Dieperink is chief investment officer at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.