How To Trade US Elections: 'A Trump Victory Is Likely To Lead To A Stronger Dollar'

The U.S. elections in November are poised to be the most significant risk event for asset markets in 2024. Though election day is still nearly six months away, the first presidential debate has been scheduled for June 27, unusually early compared to the traditional September timeline.

According to Goldman Sachs, this earlier-than-usual debate is expected to serve as a key market-moving event, with starting starting to assess potential election outcomes.

“The June 27 debate is a clear, obvious potential source of market focus, given how those episodes have led to shifts in prediction market probabilities and asset markets in the past,” stated Goldman Sachs’ analyst Dominic Wilson in a report published Wednesday.

Asset Market Impacts of Different Election Outcomes

Goldman Sachs has outlined potential impacts on asset markets based on various election outcomes:

1. Republican Sweep: Expect a modest rally in equities, higher yields, and a stronger US Dollar (USD).
2. Democratic Sweep: Likely to cause modest equity downside, higher yields, and a weaker USD.
3. Trump with Divided Government: Anticipate modest equity downside, slightly higher yields, and USD strength.
4. Biden with Divided Government: Equities could remain flat, with lower yields and a weaker USD.

These outcomes could be significantly influenced by the scale of fiscal proposals and market reactions to tariff proposals.

Moreover, other policy changes, such as geopolitical risks and Federal Reserve actions, might further impact asset markets.

USD Strength, Tariff Reactions And Equity Outlook

Goldman Sachs highlights that “the most consistent implications across approaches are for the US Dollar,” as “a Trump victory is likely to lead to a stronger dollar” through several potential channels.

The expectation of a stronger USD is the most reliable impact of a possible Republican victory, primarily due to responses to tariff risks.

Considering potential tariff reactions in the event of a Trump victory, the trade-weighted dollar, which is broadly tracked by the Invesco DB USD Index Bullish Fund ETF UUP, is expected to see a 3.6% increase.

The market response to U.S. tariffs on China in 2018 and 2019 serves as a reference point. These episodes generally led to a stronger USD, but also triggered significant equity sell-offs, which in turn lowered bond yields. “We would expect USD strength against a broader range of major currencies than in the 2018-2019 China tariff episodes,” noted Wilson.

“Tariffs have meaningful impacts on short-term inflation paths; they affect profitability and increase uncertainty for companies dependent on imported inputs or those supplying markets where retaliation is a possibility,” Goldman Sachs wrote.

Conversely, a Democratic victory could lead to USD weakness, particularly if tariff risks are well-accounted for ahead of the election.

Bond yields are more likely to rise in the event of a Republican or Democratic sweep, since the fiscal impulse will be more positive than in scenarios of divided government.

For equities, the most challenging scenario might be a “Trump with divided government” outcome, where markets react negatively to tariff proposals without compensatory fiscal or tax boosts.

While the baseline estimates from Goldman Sachs do not strongly advocate for hedging equity exposures, a significant market reaction to tariff risks or renewed focus on debt sustainability amid fiscal expansion could exert more pressure on equities.

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