Our Views on the News: US elections edition with CIO Rob Hogg
Welcome to our US Election Edition Market Update. You can read the November update here.
A faster-than-expected result in what had appeared to be a close-fought election campaign but ended up being a clear Republican victory.
In a result that was decided in a far shorter time than expected, President Trump has been re-elected, and the Republican party has a majority in the Senate and may also win control of the House of Representatives (a Republican “clean sweep”).
While President Trump’s potential victory had begun to be priced by markets during October, the swifter-than-expected announcement of his re-election has caused further sharp moves in global markets and gives a sense of investors’ expectations about the impact of his mooted policies.
US equities now expecting stronger earnings growth
US equity markets have taken the news very positively, with key market indices all ending solidly higher – up by 3% to 3.5%.
Smaller cap companies have finished even stronger (Russell 2000 rising almost 6%). The equity market seems to be pricing an expectation that mooted tax cuts and deregulation will be positive for US economic growth and company earnings.
US bonds now expecting higher inflation and fewer rate cuts. US dollar rallies further
The US bond market has continued the sell-off that began in earnest in October, with yields rising significantly further as the result became clearer. The bond market is now expecting higher inflation pressures, particularly in the shorter term (2-year bonds), and it is this change in expectations that has been most influential in driving yields higher.
The US dollar (USD) has rallied, reflecting higher growth and inflation expectations, while the extent of expected US central bank rate cuts has been further reduced and their timeframe extended.
Rest of world markets pricing weaker growth, perhaps in expectation of the impact of mooted tariffs
Market reactions in the rest of the world have been in sharp contrast to that exhibited in the US – equity markets have fallen across continental Europe, the UK, Hong Kong, and China.
As well, shorter-dated market yields have fallen sharply in Europe, which suggest along with equity market reaction, a downgrading of investor growth expectations in that region.
As a proxy for global growth, copper has experienced an initial bout of weakness following the election, which likely reflects global growth concerns (but also the fact that copper is priced in rallying USDs).
Australian market reaction has generally been a watered-down version of trends in the US
Initially, Australian equities have taken the result positively (at the overall index level), with sectors generally regarded as synonymous with the pro-growth “Trump-trade” doing best – information technology, financials (banks and insurers), industrials, and consumer discretionary.
While Australian bonds have experienced price falls as yields have risen, the extent of these price falls (yield increases) have been far less than experienced in the US.
The Australian dollar (AUD) has weakened compared with the USD, likely reflecting the strength of the USD, but also concerns about the potential impact of tariffs.
Overall winners at this stage have been:
- US equities – lower taxes, deregulation, higher domestic spending, tariffs hurting import competition.
- USD – higher rates and postponed rate cuts have caused the USD to strengthen.
- Bitcoin – Trump has spoken positively of the crypto currency, pledging to make the US “the Bitcoin superpower of the world.”
- Short maturity European bonds – as markets have begun to price weaker European growth and a heightened rate cut profile, yields have fallen on shorter-dated bonds.
Overall losers at this stage have been
- US bonds – as higher inflation and growth expectations have pushed bond yields higher (bond prices lower).
- Exporters to the US – tariffs concerns.
- European equities – potential losers from the negative impact of tariffs on global growth.
- China – seen as the most likely loser from mooted tariffs.
- ESG/Renewables – Risk of Trump slashing spending on renewables, exiting the Paris Agreement, downplaying climate change risk.
Looking forward, policy uncertainty remains
So far, markets have moved to price at least some of Trump’s pro-US growth/tariff policies being enacted, with winners and losers already being differentiated.
Despite the solid performance of the Republicans, the policy outlook remains uncertain – how many of President Trump’s policy announcements will be enacted, and over what time period?
Will Trump’s actions as President match his rhetoric?
While a Trump White House will likely be more swiftly staffed with key supporters, how long will it take for legislation to pass?
To what extent will rising bond yields place a limit on the degree of stimulus that the new administration can enact through tax cuts and other measures?
What reaction might the Chinese take to the possibility of tariffs – Chinese authorities may potentially enact significant fiscal stimulus measures, far more significant than the measures announced over the past few months.
What are we doing with our portfolios?
We will not be making significant changes to portfolio holdings in the aftermath of the election outcome.
We will, however, be looking for potential opportunities that can often present themselves in the midst of the sharp price moves we are observing in markets presently.
Read Rob’s previous macro updates
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