Trump’s tariffs and “extreme” measures would destroy the economy and trigger inflation

• Leading strategists generally agree that trying to circumvent the election is a mistake.
• However, a chief economist says there would be a notable exception if a particular outcome occurs.
• According to Tom Orlik, the candidate’s policies could harm the US economy.

The fall election season is full of debates, including Tuesday night’s refreshingly respectful and civil vice presidential showdown between Democrat Tim Walz and Republican JD Vance.

But there isn’t usually much disagreement about how to act before elections.

Top market strategists and economists at the Bloomberg Volatility Forum on Oct. 1 generally agreed on one point: Investors who don’t bet on the outcome of elections could be better off.

The race between Kamala Harris and Donald Trump will be too close, according to recent polls and leading political experts, so investors shouldn’t try to predict who will win, market veterans said.

And even if a crystal ball told traders who would win the White House, they might not make any money, as Nancy Davis, founder and chief investment officer of Quadratic Capital, noted.

“Market timing for me is something that’s really, really difficult – because even if you know the outcome of the event, you don’t necessarily know how the liquidity is positioned or how much cash is on the sidelines,” Davis said, citing the Aftermath of Brexit as an example.

Still, investors should be aware that one outcome – a Trump presidency that implements some of the toughest economic sanctions he campaigned for – could weaken growth and inflation, says Tom Orlik, chief economist at Bloomberg Economics.

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The market hasn’t freaked out because of the election, but protection can still make sense

Market volatility, as measured by the CBOE Volatility Index (VIX), was historically elevated in the month before the U.S. election, said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. The VIX typically hovers around 25 in October, Sandhu noted. For comparison, the volatility indicator is usually between 10 and 20 and rarely approaches 30.

While the VIX has risen 23% since the end of September, the so-called “fear index” is still below 20. This relatively subdued volatility has coincided with a sharp rise in US stocks. The S&P 500 is trading near record highs after interest rates were cut more than many market participants expected.

With the election looming and its impact hard to predict, it’s fair to wonder whether investors are becoming complacent. Traders who are nervous may try to hedge by buying puts or selling calls, especially since options premiums are not overly expensive.

Or as Chris Murphy, co-head of derivatives strategy at Susquehanna, put it: Investors may want “upside protection” so they don’t find themselves on the sidelines if markets suddenly rise. With volatility under control, buying calls can pay off.

“Typically we see a rally by the end of the year after the election,” Murphy said. “There are ways to protect yourself from such an upturn,” he added, without going all out, such as buying cheap calls.

An election result could trigger “seismic tremors”.

Partisans remain convinced that this election is the most important of all time. The market is not convinced, judging by where the VIX is trading just a month before Election Day.

But Bloomberg Economics’ Orlik disagrees. He sees three plausible outcomes in next month’s election, including one potentially dangerous one.

The status quo outcome would be if Harris beats Trump and Congress remains divided. In this scenario, Orlik would expect continuity and similar economic policies to Joe Biden.

Another positive outcome for investors could be that Trump wins and his second term is similar to his first, with taxes and regulations kept to a minimum, Orlik said. He noted that this type of Republican presidency has historically been one of the best environments for U.S. stocks and the economy.

“Implicit in the confident anticipation of the election on the part of financial markets is the basic assessment that it will come down to either continuity with Kamala Harris or small government,” Orlik said.

The third possible outcome is what worries Orlik: a Trump term with “extreme” policies on the tariffs and deportations of undocumented immigrants he has implemented.

“I don’t think people are really taking this possibility seriously right now, but maybe they should,” Orlik said. “Because these would be seismic shocks to the U.S. economy — an absolutely enormous impact on growth, an absolutely enormous impact on inflation and an absolutely enormous impact on Fed policy.”

Tariffs are import taxes designed to make domestic goods relatively attractive while raising money for the government that enacts them. However, many economists and strategists hate them because they can make all goods more expensive while hurting economic growth.

Both Trump and Biden have introduced tariffs against rivals such as China, but Orlik believes Trump’s latest proposals – which include a 60 percent tariff on Chinese goods and a 20 percent tariff on all other imports – will harm the U.S. economy and the would harm companies.

“Let’s think about a world where Trump comes to power and imposes a 60% tariff on China,” Orlik said. “Can anyone imagine a company — perhaps a company with a fairly large weight in U.S. stock indexes — that couldn’t operate in a world with 60% U.S.-China tariffs? A lot comes to mind: Apple, Nvidia, Qualcomm – all the major companies in the US stock indexes near record highs would essentially be unable to operate their supply chains in a world with 60% US-China tariffs.”

Murphy isn’t as concerned as Orlik since Trump could roll back tariffs at any time, but he still believes investors should be vigilant until November 5th.

“Trump sees the stock market going down and then he says, ‘I’m not doing this anymore because my stock market is going down,’ and turns around very quickly,” Murphy said. “So you potentially have to monetize those tail hedges pretty quickly, but a tail hedge like that could – in theory – be something that surprises people.”