We have had an unforgettable month in US political history. Former President Donald Trump was wounded in an attempted assassination during an election rally. And President Joe Biden has faced repeated calls from some Democratic Party leaders and donors to step down from the race.
Sadly, assassination attempts on presidents or candidates are not uncommon in US history. Four sitting presidents have been assassinated since the founding of the Republic. It is beyond the scope of this letter to join the speculation about what recent events and this election mean for the “future of the world” in a broad sense. Yet, as investors, it may be useful to examine the narrower question of the candidates’ polarized views.
One of the few things we can say with certainty about this election is that Biden and Trump have different views on how to manage the economy. President Biden favors higher taxes and a more active government role in industry. Former President Trump wants less immigration, lower taxes, and higher tariffs.
Currently, the probability of Trump winning November’s election has been rising. We believe investors should prepare for volatility, higher tariffs, and larger government deficits. We see uncertainties for the Treasury market and US dollar. However, we don’t think investors should make major adjustments to their investment plans by taking election rhetoric at face value.
The Trump plan would be a departure from current norms, but it is unlikely to be implemented in its entirety. Campaign rhetoric and future policy are often very different things. In his previous term, Trump voiced support for policies like the gold standard but did little to implement them once in office.
From an investment perspective, in the near term, we like medium-duration quality bonds for their combination of attractive yields and the potential for capital appreciation as interest rates fall. Within equities, we recommend building exposure to the “enabling layer” of the artificial intelligence (AI) value chain and focusing on companies with strong competitive positions and resilient earnings streams. And, to hedge political risks, we like capital preservation strategies in equities, as well as exposure to gold, alternative investments, and the Swiss franc.
Longer term, global diversification remains a key principle and protection for investors. President Biden has complained about “elites” attempting to block his reelection bid. Trump has criticized Biden’s track record on immigration. But frustrations about “elites” or “immigrants” are not limited to the presidential candidates and have contributed to polarization in several countries. Centrist politicians spent many years promising that pro-globalization and free trade policies would make for a better world. And they did, at least for many of us who read or write investment letters. But they have been unable to provide widely accepted answers to perceived problems like inequality, environmental degradation, and national security.
Extreme right- or left-wing parties have not (yet) taken control of the world economy. But as long as voter satisfaction remains low, voters may continue to seek answers at the fringes. Potential consequences for investors include currency and local equity market volatility, with increasing risks of higher taxes, higher inflation, and higher interest rates. In the remainder of this letter, I focus on global politics—what the recent uncertainty over President Biden’s candidacy means for investors, whether tariff threats might lead to a trade war, and how investors should view the results of recent elections in France and the UK.
