‘Dr Doom’ who predicted the great financial crash says a Trump win could be BAD for your money – here’s how to protect your investments

It’s been a tumultuous few weeks in US politics.

Joe Biden’s decision on Sunday to abandon his bid for a second term was the latest twist in the dramatic race for the White House.

It followed the attempted assassination of Donald Trump at a rally in the rust-belt heart of de-industrialised America.

The Republican nominee was already ahead in the polls after President Biden’s lamentable performance in a TV debate last month.

But Trump’s chances of winning November’s election were further boosted after he was shot in the right ear during a campaign event in Pennsylvania.

Now he faces the prospect of squaring off against Kamala Harris, Biden’s deputy, if – as seems likely – she is endorsed as the Democrat’s candidate at next month’s national convention in Chicago.

Nevertheless, Trump remains the firm favourite to return to the Oval Office.

So how should investors approach the growing prospect of a second Trump term? In particular, what stocks should you buy – and which ones might be best avoided? And just what is the ‘Trump Trade’?

Biden’s withdrawal from the Presidential race was not unexpected and financial markets yesterday were calm.

More instructive was how they responded to news of Trump’s near-death experience.

The dollar edged higher while Wall Street’s main stock market indices – the S&P 500, the Dow Jones Industrial Average, and the tech-heavy Nasdaq – also gained a bit.

But this being America, it was shares in prison operators and gun makers that were among the biggest winners.

Trump’s plans to crack down on immigration are likely to boost demand for detention centres and he is staunch opponent of gun control, traders noted.

Crypto currencies also jumped.

Trump has slammed Democrats’ efforts to regulate the sector and he is still due to speak at a bitcoin conference in Nashville, Tennessee on Saturday (27 July).

On the flip side, green energy stocks fell back amid expectations Trump would roll back Biden’s climate change policies and resume drilling for oil and gas.

Such reactions might be dismissed as knee-jerk, but they are also informed by Trump’s words and actions when he was in the White House between 2016 and 2020.

His previous presidency gave rise to term the ‘Trump Trade’ – market movements and investor behaviours shaped by Trump’s economic policies and political actions.

These included promises of deregulation, tax cuts, tariffs hikes and increased infrastructure spending funded by more borrowing.

This controversial agenda – which Trump plans to repeat if elected again – had many critics but was seen as broadly ‘pro-business’.

It certainly helped to lift the US stock market.

The S&P rose by 62 per cent between Trump being re-elected in 2016 and the start of the pandemic four years later, according to experts at investment bank Saxo.

Among the sectors that fared best was technology.

Cash-rich Silicon Valley firms took advantage of lower corporate tax rates to repatriate funds held overseas to increase investments, launch share buybacks and pay dividends, lifting share prices.

Banks also gained as rules designed to make lenders safer by forcing them to set aside more rainy-day money were watered down.

The cost of US bonds – government debt known as Treasuries – rose in the two years after Trump’s election amid the belief that higher government spending would lead to higher borrowing.

The dollar also gained against major currencies including the pound on hopes of stronger economic growth and higher interest rates.

So will history repeat itself if Trump wins a second term? 

Dr Doom – aka Nobel prize-winning economist Nouriel Roubini – is not so sure.

Roubini, who earned his moniker for making often gloomy predictions, warns that another Trump presidency could spark a trade war that might hit stock markets.

Trump plans to slap a ten per cent a ten per cent tariff on all imports into the US, including those from the UK, and up to 60 per cent on goods from China, which will lead to higher prices.

He fears that could provoke a tit-for-tat retaliation – with dire consequences for investors.

‘I would say protectionism is going to lead to a gradual increase in inflation and that will be something that will be of concern, certainly to the bond market,’ he told news agency Bloomberg.

‘A global trade war is not going to be good of the stock market,’ he added.

But Trump is nothing if not a dealmaker.

Roubini suggests he may offer some ‘carrots and sticks’.

That could include cutting or scrapping tariffs on Nato allies if they commit to more defence spending.

‘President Trump has been critical about the way Nato has been funded and has demanded other members start allocating much bigger parts of their budgets to defence,’ says Susannah Streeter of investment platform Hargreaves Lansdown.

‘If he comes to power, it’s likely these calls will intensify and, unless they are met, there is the risk that the core commitment to the principle of collective security could be diluted.

Defence stocks tend do well under Republican administrations, says Jason Hollands, managing director at wealth manager Evelyn Partners, but warns ‘this may not play out this time.’

That’s because of Trump’s stance on continued US support for Ukraine in its war against Russia.

Fears that the US may abandon Kyiv altogether if Trump returns to power rose after he picked JD Vance to be his running mate for vice-president.

Vance is one of Congress’s most vocal opponents of support to Ukraine and led an unsuccessful campaign in the Senate to block the Biden administration’s £46billion aid package.

Hollands urges caution not just on defence stocks, but across the board.

‘In theory, sectors that might perform well under Trump 2.0 include banks, healthcare the energy sector given his mantra of ‘drill, baby, drill!’.

‘But it is worth noting that renewables actually performed well under his previous presidency while they have tanked under Net Zero advocate Joe Biden.

‘So I would exercise a degree of caution about election-related stock trades as things often turn out differently to what might be expected,’ Hollands adds.

Perhaps the biggest difference between the last Trump presidency and the next one would be interest rates.

During his first term, Trump relentlessly attacked the US Federal Reserve for raising the cost the borrowing to prevent the economy from overheating.

In reality the US central bank, which is independent of the government and has a mandate to keep inflation under control, kept interest rates at historically low levels.

They peaked at 2.5 per cent while Trump was in office – less than half their current rate.

There have been reports that Trump may take matters into his own hands by sacking Federal reserve chairman Jerome Powell and slashing rates himself.

Experts say such a drastic move is unlikely as it would spook the very stock markets that Trump himself pays so much attention to and uses as a yardstick for his success.

When the Dow Jones hit 30,000 in 2020, he even took the highly unusual step of calling an impromptu press conference to mark the milestone.

Trump being Trump, he took most of the credit himself.

‘He has already said he would not reappoint Jerome Powell should he win, and instead is expected to try to install a Fed chair with explicitly dovish tendencies to help support economic growth,’ notes Hollands.

‘However, keeping rates at artificially low levels risks reigniting inflation and could weaken the US dollar,’ Hollands adds.

While the Trump playbook is well rehearsed, past performance is no guarantee of his future behaviour – especially with someone who has literally dodged a bullet.

If there is one thing is for sure, it is nothing is certain.

‘With Trump there is always a lot of bravado and gamesmanship, so predicting what he’ll actually do is pretty tough,’ says CJ Cowan of wealth manager Quilter Investors.

In other words, second-guessing Trump is a bit like playing poker with a drunk.

Always expect the unexpected.

THE TRUMP TRADE: WHAT TO BUY…   

Trump’s policies of tax cuts, tariff hikes and tougher immigration curbs are broadly seen to be inflationary.

Experts say gold is the traditional safe haven in such circumstances as it is a store of value, meaning it tends to keep it’s worth rather declining over time.

If interest rates stay high to keep price rises in check in a second Trump term US banks should benefit, says Hargreaves Lansdown’s Streeter.

That’s because their net interest margins – the difference between what they charge borrowers and pay savers – would be boosted.

Wells Fargo, Bank of America and smaller lenders could gain under this scenario, she adds.

Any relaxation of financial rules could see an uptick in deals, helping the likes of investment banks JP Morgan and Goldman Sachs.

Gainers from lighter regulation of the labour market under Trump could include online delivery groups such as Uber and Doordash, which are reliant on armies of the self-employed.

Energy giants such as Exxon Mobil, oil services supplier Schlumberger and equipment maker Baker Hughes are also well placed if drilling picks up again, she notes.

An outbreak of trade wars as Trump tries to protect homegrown companies may lift manufacturers focused on the US domestic market such as car makers General Motors and Ford.

And tariffs on big Chinese e-commerce players would also benefit Amazon and retailers with a big online presence like Walmart, Streeter suggests.

Trump’s stance on Nato means it is ‘likely’ defence spending across the alliance will increase, which would boost companies with ongoing military contracts.

‘UK-listed aerospace stocks (such as BAE Systems) are among those that are likely to benefit from a fresh round of investment into bolstering armed forces,’ she adds.

 ….AND PERHAPS AVOID

 One sector that could suffer under Trump is semiconductors.

Shares in Taiwanese chip maker TSMC fell last week after he warned Taiwan should pay the US for its defence.

Washington is Taiwan’s biggest military backer and has vowed to defend the island if neighbouring China invaded to seize what Beijing claims is its own territory.

Trump’s comments cast doubt on that promise.

Taiwan makes more than 90 per cent of the world’s most advanced chips that are used in satellites, stealth jets and, increasingly, artificial intelligence (AI).

TSMC makes most of the high-end chips used by Nvidia, the AI-chip designer which briefly became the world’s biggest quoted company last month.

Nvidia’s shares also fell on Trump’s warning, diving by 7 per cent on the news and snipping $200 billion off its price tag in a single day.

A Trump win could also have ‘profound implications’ for the eurozone, says investment bank Goldman Sachs.

Higher trade tariffs and extra defence and security measures could knock 1 per cent off the bloc’s growth, it warned.

HOW TO INVEST IN STOCKS FROM THE UK

British investors can buy American stocks through an online broker but may pay higher trading or administration fee.

UK-based shareholders of US companies must fill in a W-8 BEN form which allows them to pay a reduced tax rate on the investment.