Credit markets will see more agitation if former President Trump wins reelection in November, according to an analyst note from UBS strategist Matthew Mish.
That’s because most of the effects of a possible Harris presidency have already been priced into the market. “A Harris administration would be closer to the status quo, or what the market has been used to in recent years, and thus already reflected in market prices,” Mish told Fortune in an email.
Regardless of the outcome of the election, Mish expects there to be limited impact on credit markets at the macro level; however, there will be some shifts in individual sectors. Each candidate would affect different sectors of credit markets and to varying degrees. “Impacts cut across more sectors in the case of a Trump win,” Mish said.
Credit markets refers to the marketplace for loans between different entities, usually between companies and financial institutions. They can often serve as a bellwether for the economy since they’re reliant on spending levels, attitudes about the future, and especially interest rates. When the economy is doing well, creditors are more willing to extend risky loans that net them higher interest payments. Conversely, when the economy is in a downturn, credit markets tighten over fears debtors won’t be able to pay their loans back. For example, when inflation was soaring and the economy feared a recession in 2022, credit markets came to a near standstill. Credit markets have since recovered, as a soft landing appears more likely.
If Harris were to win the election, investors could expect a strong showing in credit markets for capital goods, utilities, and basic industry. Sectors that would suffer include aerospace, tech, banks, and auto credit. A Trump win would mean the exact opposite, with many industries benefiting from his hands-off approach to big business, according to Mish.
“The common theme through a lot of the sectors that would do well under a Trump win is deregulation,” he said.
Mish reached his conclusion based on how the credit markets reacted to changes in the race. “This is what the market is telling us based on how sectors are trading in relation to swings in the polls,” he said.
View this interactive chart on Fortune.com
For his analysis, Mish looked at reactions in the credit markets as each candidate rose in the polls. Trump’s rise in the polls came from mid-May to mid-July, when President Joe Biden was still in the race and Trump appeared headed for a certain victory. But after Biden dropped out of the race in July in favor of Kamala Harris, she has since shot up the polls and overtaken Trump.
In investment-grade credit, sectors such as capital goods, utilities, and basic industry were all expected to benefit from continued government spending. Those parts of the credit markets are forecasted to improve under a Harris presidency largely because she is expected to continue Biden-era policies such as the Inflation Reduction Act (IRA), the CHIPS Act, and the Bipartisan Infrastructure Deal, according to Mish. Meanwhile, Trump seems intent on repealing the IRA on the grounds that its environmental regulations are bad for business.
“A Harris win would lower the risk that funding/spending for some of these initiatives would be rolled back,” Mish said.
In the high-yield credit markets, sectors like autos, energy, and aerospace would suffer under Harris and do well with Trump. The energy sector could suffer under a Democratic president because the market is probably pricing in an increased likelihood of more regulation and limits around production, according to Mish. Markets also tend to penalize the aerospace industry in the lead-up to a Democratic victory on the grounds the party is less favorable to defense spending than the Republicans, and UBS’s model echoed that conventional wisdom, expecting a drop because of “a less supportive agenda for defense spending,” Mish wrote.
Credit in the auto industry would perform worse under Harris because Mish expects her to accelerate the adoption of EVs, which are less profitable. On the other hand, Trump has long disliked EVs, often conflating tax credits for those who purchase them with a government mandate requiring people to buy them. However, he has admitted to changing his tune on EVs since receiving the endorsement of Tesla CEO Elon Musk.
Each candidate's approach to M&A could also shape the state of credit markets in the future. Democrats in office often tend to favor closer scrutiny of corporate mergers, which could affect industries like banking, tech, and telecom. However, now some Republicans also support applying stricter rules to consolidation in the corporate world. Trump’s running mate, Ohio Senator JD Vance, has regularly criticized Big Tech and voiced support for FTC chair Lina Khan, a Biden appointee
Other sectors in the high-yield credit markets had less of a clear-cut relationship to changes in the polls. That’s a sign that the election is just one variable in an uncertain macroeconomic landscape, with possible interest rate cuts and the possibility of nailing the soft landing, according to Mish. The lack of an obvious correlation between the state of the race and credit markets is “possibly a signal that investors simply view other factors as more impactful now,” he wrote.
