As we approach the next U.S. presidential election, the political landscape is heating up with Kamala Harris gaining momentum, yet Donald Trump still leading in the polls. This has sparked a surge in so-called ‘Trump trades,’ reminiscent of market reactions seen during his previous tenure.
However, beyond a noticeable shift from sustainable investments to banking sectors and a boost in U.S. small-cap stocks, largely driven by Federal Reserve Chairman Jerome Powell, significant economic movements remain sparse. The standout exception is Bitcoin, which has seen substantial gains since Trump’s comments on July 13.
A critical yet under-discussed issue is the potential for ballooning budget deficits under another Trump administration. A recent graph from Bank of America, highlighted below, underscores the alarming trend of average budget deficits per U.S. president.
The concerning takeaway is the excessive deficits under both Trump and Biden, comparable to periods of war. While COVID-19 has played a significant role, the current scale of the U.S. economy raises legitimate questions about these exorbitant deficits. Unfortunately, satisfactory answers seem unlikely in the near future, with expectations of continued large deficits even if Trump is re-elected.
Demolition politics
The current political climate, marked by polarization, leads to what I call ‘predatory politics.’ Election results often result in the wholesale dismantling of the previous administration’s policies, a process inherently costly. This phenomenon is not just an American issue; it’s also evident in Europe.
Economic foundations
When Trump took office in 2017, the economy appeared robust, prompting the Federal Reserve to initiate interest rate hikes for the first time since the Great Financial Crisis. These hikes, starting modestly and capping at 2.50%, have since climbed three percentage points higher. Interestingly, the U.S. economy has shown less sensitivity to these hikes than anticipated, which could mean less economic ‘upside’ during future rate cuts. The likelihood of returning to the extremely low rates of the past remains slim.
The direct impact of higher interest rates on the budget is undeniable. Interest costs as a percentage of GDP and government revenues have surged dramatically, adding to fiscal pressures.
Protectionism and trade wars
Trump’s infamous declaration that ‘trade wars are good, and easy to win’ could soon be put to the test again. While Biden has maintained many trade restrictions without bearing full responsibility, a second Trump term might escalate these policies further. Meanwhile, China’s increasingly aggressive stance suggests high chances of retaliation, which could negatively impact companies like ASML.
Trump’s tax cuts significantly boosted U.S. corporate profits, enhancing their global dominance. However, many of these tax cuts are set to expire in 2026. Should Trump extend them, it could add another 3,000 to 5,000 billion dollars to the deficit.
Defense, healthcare, and social services
Defense, healthcare, and social services are the perennial heavyweights on the budget, growing faster than expected revenues. These areas are challenging to cut, making budget management even more complex.
If Trump is re-elected, he won’t find an easy economic environment. The pressure to increase spending will likely grow, compounded by an aging population reducing labor force growth. This makes the potential for even larger budget deficits a significant risk. The ensuing debt could drastically affect traditional 60-40 investment portfolios, inviting lower interest rates, increased volatility, and higher inflation, which are not conducive to bond investments.
Jeroen Blokland analyzes financial markets and macroeconomics in his newsletter, The Market Routine, and manages his multi-asset fund. He previously served as head of multi-asset at Robeco.