David Zervos: The key policy differences between Trump and Biden and what they mean for markets

For financial markets, the election is primarily about differences in regulatory policy. 

With less than 140 days to go until the U.S. presidential election, the policy differences between Donald Trump and Joe Biden are becoming a key focus for financial markets. Looking back to 2016, I wrote a handful of notes to clients on the likely market impact from Trump vs. Clinton policy differences with far less available information. This time, the exercise is much easier since one can simply go back to the tape and compare both track records. 

Just as I did 8 years ago, I will break the policy discussion into five categories: monetary, fiscal, trade, immigration, and regulation. And please remember, throughout this exercise my sole focus is on financial markets. By no means am I interested in tackling any impact policy differences may have upon non-market related subjects. 

So let’s begin with monetary policy. Trump’s two picks for the Federal Reserve Board were Christopher Waller and Michelle Bowman — two of the most stalwart members of the board during our inflation battle over the last 3 years. These two consistently pushed back on more dovish outlooks from both the market and other colleagues. And Trump’s choice for Jerome Powell as the replacement for Janet Yellen was certainly a more hawkish choice. Now I know that many have pointed to Trump’s public battle with Powell in 2018 over hikes as a reason to think about a more dovish Fed under Trump. But it did turn out that those hikes were much more of a mistake in retrospect — especially as Powell was cutting by mid-2019. To say that a Trump Fed will be less concerned about inflation, or more dovish in general, seems a real stretch. Especially with the Biden picks of Lisa Cook and Philip Jefferson, as neither have been particularly outspoken on the inflation battle. And those looking for Fed independence to be compromised under Trump, I will only guide you in the direction of Bill Dudley’s 2019 Bloomberg News op-ed where political motivations on the Democratic side were on full display. The reality is that there are probably not huge differences in monetary policy calibration or independence under either outcome, at least in the early days while Powell is still there. 

Now let’s turn to fiscal policy. Here we have three clean years of Trump before Covid to consider. In 2017, 2018, and 2019 the debt/GDP ratio hovered just around 105% with a small upward trend. Of course, when Covid hit all fiscal bets went off the table. Yet, in normal times, it would be quite difficult to say that Trump was fiscally profligate. By contrast, Biden’s record of running much larger than normal deficits, even as the economy and markets recovered post-Covid, seems far more concerning on the fiscal side. That said, Biden has presided over a sharp drop in the debt/GDP ratio from the Covid peaks in 2020, which one could argue is much less reckless than his deficit numbers might suggest. All in all, neither Trump nor Biden embraces fiscal parsimony, so I really don’t see major policy differences here to drive markets. I could be persuaded that there would be less fiscal crowding out under Trump, and thus stronger potential growth, but I think that’s more of a regulatory policy narrative than a fiscal one. In the end, the debt and deficit storylines will likely be more of the same in either case. 

Trade policy is easy. Neither candidate seems to be interested in pushing forward a free trade agenda. Biden never got rid of Trump’s tariffs, and in some cases strengthened the protectionist stance. I can hardly find any major policy differences here other than distributional ones. Trump may be harder on China, all else equal. But both will favor maintaining or increasing the protectionist polices which always come with more populist political outcomes. 

On immigration there are large differences, but I doubt they are meaningful for financial markets. In an economy of 330 million, a relative change of 3-5 million migrants (illegal or not) does not move the needle. We could talk about some of the lower wage effects that come with increased migration flows. And we could talk about the increases in aggregate demand that come with those flows as well. But flipping that back to calculus which moves the stock indexes, 10-year Treasury yields, or the dollar is not easy. I will concede there are large differences in immigration polices under the two candidates, but I don’t think they move the macro needle meaningfully. 

Finally, the big kahuna, regulatory policy. I fully expect that Cato, Heritage, AEI, and AFPI have already drafted hundreds of executive orders that will be ready to go on day one for Trump. And the bulk of those will focus on deregulation. While he cannot unilaterally change fiscal or monetary policies, he can easily alter trade, immigration, and regulatory policies. And it will be those deregulatory actions in sectors such as energy, healthcare, technology, consumer, and financial which drive the financial markets. Take a look at the NFIB Small Business Optimism survey back in 2016. 

Small business optimism skyrocketed when Trump won on a tidal wave of expected and actual deregulation actions. This will be the major change for financial markets under a Trump vs. Biden win in 2024. Stocks are likely to jump initially under Trump as this Goldilocks-style positive supply shock gets rid of all discussions about either the “stag” or the “flation” that has been plaguing current market discussions.

Initially, rates may jump and the dollar may strengthen as well, but I see the rate shock fading on a positive supply side storyline. The primary market moves on election night will come through the equity side as a result of significant regulatory policy divergences.  Under a Biden win, it will be status quo in markets. With a Trump win, S&P 500 futures that night will get some serious legs.