US election: the implications of Donald Trump's victory

Emotion apart, markets are all about business; it is important to separate the short-term reaction from the longer-term implications.

06 November 2024

As Donald Trump secured victory in the US election and Republicans took the Senate and also looked set to potentially take the House, it is important to remember that political passions and culture wars do not translate well to markets, and indeed rarely have done in the past.

Donald Trump is a divisive character to say the least, and readers will have their own strong views about him. But for markets it is strictly about business, whether there is an election campaign currently running or not. So it is important in the aftermath of elections to separate the short term from the longer term.

In the short term, markets are reflecting what they see as the ‘Trump trade’. This means strong gains in US equity futures this morning given that the tax cuts of 2017 will presumably be extended for consumers and business owners. It also means gains in technology stocks since Mr. Trump’s significant backers include Elon Musk who is set to become the new administration’s efficiency czar. But it also means a firmer US dollar amid concerns that a booming US economy already nursing a significant budget deficit will run out of capacity and, along with the presumed imposition of tariffs, will drive up inflation and therefore rates too. US Treasuries concur, with real yields (growth expectations) rising and breakevens (inflation expectations) rocketing even faster, pushing the 10-year US Treasury yield up beyond a heady 4.4%. There are potentially implications for the US Federal Reserve (Fed) which only recently cut rates by 50 basis points (bps) and meets again this week but now – awkwardly – faces a stronger economy and maybe even more future inflation as described. The market-anticipated 50 bps cut may have to be revised, although the Fed of course will be at pains to stress that it does not react to political events, only the data in front of it.

All of this in turn could weigh heavily on emerging market stocks which are exposed to dollar-denomination of trade and which were already cooling anyway amid scepticism of the recent China stimulus initiative.

The question is how aligned or otherwise is all this high-frequency noise with a considered view of the long-term US economic and market outlook? The answer is probably quite a bit, as it happens. The US economy has quietly been doing well anyway. The Michigan Consumer Sentiment survey has been broadly rising since mid-2022, unemployment remains low at 4.1%, the economy added 223,000 jobs in September before the distortive effects of the recent hurricane and Boeing strike (now resolved) and wages are growing at 4% on the previous year, firmly ahead of inflation. Combine all this with the on-going Artificial Intelligence (AI) revolution (see Palantir’s higher profit forecast yesterday amid “unwavering” AI demand), and US corporate earnings look to be in good shape. If the immediate market response to the election chimes with much of the long-term analysis, then so be it. But it is the long-term fundamental picture that investors must continue to focus on and, from this angle, America is looking golden.

What really matters: economic growth and corporate earnings were picking up anyway:

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