JP Morgan says financial markets are starting to price in a Trump win and a potential Republican sweep. According to JP Morgan, stocks are starting to price in a Trump victory or even a landslide Republican win. The recent rally in U.S. stocks to all-time highs and the outperformance of U.S. banks in particular are signs that investors are betting on former President Donald Trump winning the November general election, the bank strategist wrote on Wednesday, and more interestingly, it follows a pattern very similar to Trump’s victory in 2016. Meanwhile, U.S. banks have rallied as Trump is expected to ease regulation compared to the Biden administration. Regional banking fund profits are up 5.9% this month alone, with the financial sector the best performing sector this month.
Similar signs are evident elsewhere in the market. The U.S. dollar index rose to its highest level since August. Treasury yields are rising and the 10-year yield has exceeded 4%. “Markets are now pricing in the Trump trade,” the analyst wrote. The recent moves in the dollar and bond yields are still modest compared to 2016, according to the analyst. Since the three-month period leading up to the election began in early August, we have seen relatively modest moves so far. 5-year bond yields are flat, U.S. stocks are outperforming non-U.S. stocks by 2.5%. U.S. banks are outperforming the SPX by 2%, and credit spreads are 15 basis points tighter, the analyst wrote. This means that Trump’s chances of winning are significantly higher than two weeks ago.
The analyst then recalls what happened to stock markets when the odds of a Republican victory increased in the 2016 election, and argues that a Republican victory has not yet been fully priced in. Here is the 2016 data: A 100 basis point increase in 5-year bond yields, with US stocks outperforming non-US stocks by 6%, US banks outperforming the S&P 500 by 15%, and US corporate credit spreads narrowing by 40 basis points. He concluded by saying that the Republican takeover of both houses of Congress, as well as the White House, is expected to eventually support Bitcoin and gold prices, although it has not yet been fully priced into the market.
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