28 Aug

Reelection Prospects: Should Trump Be Concerned?

WRITTEN BY Vineet Kulkarni

The benchmark Treasury yields continued to fall on Tuesday. The ten-year Treasury yield continued to trade below the two-year yield, which points to an impending recession. Considering the current data, how will the economy impact President Trump’s reelection prospects?

President Trump’s reelection prospects

According to CNBC’s Jim Cramer, the recession could put President Trump’s reelection prospects in danger next year. However, Cramer thinks that the association of a yield curve inversion and a looming recession is faulty. As a result, stocks are still the best investments.

US economy looks strong

There are several views about whether the yield curve inversion signals a recession or if it’s a false alarm. However, a recession might jeopardize President Trump’s reelection chances. Interestingly, President Trump has been confident about the US economy. Earlier, he said that the economy is far from a recession.

Many economic indicators support President Trump’s rhetoric. The US GDP was way better in the second quarter. The US GDP reported a growth rate of 2.1%, which beat the estimates of 1.8% for the quarter. Also, US consumer spending continued to show optimism despite challenges.

US retail sales rose 0.7% in July, which beat analysts’ expectations. Strong growth in the retail sector indicates that the consumer sentiment is positive and spending might continue. US unemployment fell to 3.6% in May—the lowest level in the last 49 years.

Based on the data, the US economy looks strong. However, in the past few decades, yield curve inversion has occurred every time before a recession.

On August 14, in an interview with Fox Business Network, former Fed Chair Janet Yellen said, “Historically, it has been a pretty good signal of recession. And I think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal. The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.”

Trade war with China

The trade relations with China are still uncertain a year into the tariff war. Despite three conciliatory talks in the past, there hasn’t been a concrete solution to the trade war.

The S&P 500 (SPY) and the Dow Jones Industrial Average (DIA) have fallen more than 5% each from their respective highs in the last month. However, markets are sitting on a handsome gain YTD (year-to-date). So far, SPY and DIA have risen about 15% this year. Since President Trump assumed office on January 20, 2017, SPY has returned around 20%.

Jeffrey Gundlach’s thoughts on reelection prospects

Interestingly, Jeffrey Gundlach has a different take on the whole scenario. According to Gundlach, President Trump is intentionally weakening the economy in the short term so that when the Fed cuts rates, it would be beneficial before the election, according to Oregonlive.com. Gundlach sees a 75% chance of a recession before the election next year.

President Trump uses Twitter to badger the Fed. He has attacked Fed Chair Jerome Powell multiple times about being slow to cut rates. President Trump demanded a 1% rate cut and quantitative easing early last week. Would a rate cut be enough to avoid a potential recession?

There are still approximately 14 months before the election. However, a trade deal with China seems unlikely by then considering previous talks. We’ll have to see how the trade war plays out by next year and whether other economic indicators continue to support President Trump’s reelection.

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