Two friends of mine panic-sold much of their stock portfolios in 2016 when Trump won his first election.
Both missed out on significant gains, as stock prices (and interest rates) shot up unexpectedly after the election.
Economists like Paul Krugman (“the markets will never recover”) had convinced my friends that Trump would destroy the economy and bring on a recession.
But the market saw this: (1) A GOP sweep of the House, Senate, and the presidency made more legislation and spending more likely; (2) The GOP sweep made deregulation – a big driver of growth – more likely; (3) The GOP sweep made tax cuts and higher deficits more likely.
In other words, the markets responded to the two things they always focus on: the likelihood of more growth and more inflation (which pushes up rates).
Since the GOP swept in 2024, rates have risen about 1/2%. But they have risen over 1.5% since they bottomed out in February.
So – is the GOP bad for interest rates? Let’s analyze this briefly.
2018: The Dems took the House, but the GOP held the Senate and the Presidency. Rates fell over the next few months. Gridlock fended off spending concerns, but the real driver of lower rates was slower growth concerns.
2020: Dems swept it all. Rates started to edge higher but didn’t really move higher until the Dems passed even more stimulus than before (making us all miss good old-fashioned gridlock). COVID kept rates low for a while until the stimulus triggered inflation that drove rates much higher.
2022: The GOP took the House, but the Dems held the Senate and the presidency – in other words: gridlock, so less spending (woohoo!). Rates fell. But – it was largely because of a cooler CPI print.
2024: The GOP swept. Rates edged higher at first (on growth prospects) but started to edge much lower on cooler inflation numbers…until the Iran War started.
Two big takeaways: (1) if you want lower rates, hope for gridlock because that helps slow spending; (2) market forces/data (inflation, jobs numbers, GDP growth, etc.) have a much bigger impact in the near term than who is in power.
The Most Likely Thing To Bring Down Rates
The biggest impact on rates right now is the Iran War – given that it has pushed rates up 1.5% since it started.
There is a theory amongst the anti-globalists that the “evil globalists” (who hate Trump) are trying to pull strings to keep the Iran War going through the election because they want to see higher energy prices through the midterms – to make voters (angry about gas prices) less likely to vote for GOP candidates.
The “globalists” include EU politicians, the Bush-era GOP, the Clinton-era Dems, George Soros, and the Davos crowd. The anti-globalists include the sound money crowd and the America First/tariffs/less immigration crowd.
The theory holds some weight, given the globalists’ antipathy toward Mr. Trump.
In addition, even some of Trump’s detractors in the media are now saying that Iran is now suffering severely from the shipping blockade and sanctions (sky-high inflation, massive shortages, no cash coming into the economy).
Mr. Trump is also unlikely to risk decisive action against Iran prior to the election, as it might push oil prices higher temporarily and/or upset his anti-war base.
So, some sort of resolution to the Iran War is a real possibility after the election.
That will bring rates way down – no matter which party wins the House or the Senate.
