Equities good place to be even if Trump 2.0 inflation fears are realized: JPMorgan

Investing.com — Former President Donald Trump has been closing the gap on the rival Kamala Harris for the White House, boosting the odds of a “Republican sweep,” but as concerns grow over a second Trump presidency boosting inflation, JPMorgan believes that equities will be a good place to hedge inflation risks. 

“Equities, as a real asset, are the most effective hedge against inflation and thus from an asset allocation point of view an essential overweight for those fearing inflation risks during a second Trump presidency,” JPMorgan analysts said in a note.

The odds of a total sweep by Republicans in the Nov. 5 election have moved closer to 50% in the Polymarket prediction market.

History shows that during periods of macro certainty and stability, the return on equities remain stable and show low sensitivity to even “large swings in interest rates,” the analysts said.

“Since 1996, the equity yield of the S&P500 has been hovering between 6% and 8% even as bond and cash yields trended lower for more than two decades approaching zero by March 2020,” they added.

In contrast, during the period of high macro or policy uncertainty seen between 1967 and 1981, “the equity yield of the S&P500 exhibited high sensitivity to interest rates.”

The note comes as recent polls show Trump narrowing the gap with Harris in key battleground states, increasing the possibility of a Republican victory in both the White House and Congress, a so-called Republican sweep.

But the rising prospect of a Trump win is at the same time “raising fears among investors that inflation will reemerge as a problem at some point in late 2025 or 2026 amid a combination of looser fiscal policy and potential for supply chain disruptions,” the analysts said.

Looking at the red-hot inflationary period from mid-2020 to mid-2023, which was aided by huge fiscal stimulus and supply disruptions, may provide some clues on how investors could position for a similar scenario. 

Mostly equities, energy as well as industrial metals among commodities managed “to beat inflation,” the analysts said, while “bonds in general underperformed inflation and that was also true with gold.”