Welcome Back Mr President!

Introduction

Donald Trump will become the 47th president of the United States. The past president is only the second person in American history to be re-elected to non-consecutive terms after obtaining the 270 Electoral College votes required.

Republicans will restore majority control of the Senate with at least 51 seats while final votes are being counted. Meanwhile, due to close contests in the House of Representatives, the general makeup of Congress can take a few more days or weeks to decide. Nevertheless, the election outcome is clear, and we think investors should base their investment strategies on what the Trump 2.0 era may shape up to be.

Immediate market reaction, US equities were up strongly on Wednesday with S&P 500 2.5% and the Russell 2000 small-cap index was up by around 6%. Tech-heavy Nasdaq was up 3% yesterday. All rising on anticipation of stronger domestic growth, increased M&A activity, an extension to personal tax cuts, and hopes of lower corporate taxes. By contrast, bond yields rose sharply with 10- year US Treasury yields rising by 18 basis points to 4.44% in anticipation of larger budget deficits and nominal GDP growth. In relation to the euro, the US dollar has gained 1.7% power and gold is down over 3%. Bitcoin rose over 10% to its highest level.

With a possible increase in trade tariffs under a Trump 2.0 presidency, Chinese assets fell sharply with the Hang Seng index falling by as much as 2% and the Chinese yuan also weakening by 0.5% against the US dollar. Elsewhere in Asia, Japan's Nikkei 225 index rose 2.6% and the yen slipped by 1.5%. The Euro Stoxx 50 is up 0.9%. The Mexican peso was also in the firing line as it traded down by 3% against the US dollar.

Implications for the policy, the economy, and geopolitics

Trump ran on a platform of deregulation, trade tariffs, immigration controls, lowering corporate taxes, extending personal income tax cuts, and re-asserting the USA’s place in the world. A lot will also depend on what the Trump administration may look like, and who he appoints at the key positions. And this may take some time. Anyhow, he would have more freedom to implement his policy agenda if the Republicans were able to take control of Congress, and this may not get clear until a few days. However, given the already significant government budget deficits, several policy initiatives may be constrained by small congressional majorities.

We believe that the policy that has the most ability to affect the economy is tariffs. Global trade will be impacted by the planned 60% tariff on Chinese imports and 10% tax on all imports. Inversely, this might limit global growth and reduce domestic demand and corporate profits in the US. An additional round of inflationary pressures could be triggered by higher tariffs.

It is still too early to call what tariffs will truly pass through. In past discussions, trade or other concessions, or legal challenges have had a significant impact on the final tariffs to get implemented. Lastly, the introduction of fresh tariffs will take time to take hold and may not come into force until the second half of 2025 or even 2026.

In terms of fiscal policy, we believe that the election outcome lowers short-term fiscal risks related to government funding (20 December deadline) and the debt ceiling suspension's expiration (2 January deadline). Fiscal hawks in Congress may decide to thwart or curtail legislation that would further increase the deficit, particularly if Congressional majorities are limited, given that the deficit as a percentage of GDP is now twice as big as it was at the beginning of Trump's first term and that interest rates are higher. In that context, it will be interesting to see if Trump is able to do all of his campaign promises – lower corporate taxes to 15% from 21%, extend the expiring personal tax cuts until the end of 2025, and provide a number of other earned income tax exemptions.

Given the significant level of uncertainty around policy execution, we do not anticipate the Fed changing its outlook anytime soon. Instead, we expect it to continue moving toward a neutral policy stance. We anticipate a 25 bps rate decrease later today and in December as well with another 100 bps of easing in 2025. If the Fed believes that changes in trade, migration, or fiscal policy will lead to higher inflation, it may, at the margin, reduce the rate-cutting pace.

In other areas, we anticipate policies that facilitate the rapid deregulation of the financial services and fossil fuel energy sectors. From a geopolitical standpoint, we believe that a Trump presidency would likely result in a more confrontational approach with China, test transatlantic relations regarding trade and the conflict in Ukraine, and go for maximum pressure toward Iran, all of which would keep the risk of Middle East escalation high.

What will it mean for markets?

Equities

The weeks after a presidential election have historically seen a surge in US stocks. As political uncertainty reduces, investor optimism is reflected in this post-election rally pattern (table below). Also, the benign US growth outlook, lower interest rates, and the ongoing structural tailwind from AI should lead US equities higher through to the year-end and into the next year.

How stocks have done from election day till the end of the year (source: Carson Research)

Under Trump, lower corporate taxes and/or deregulation will be a further boost to certain sectors including tech, banking, and energy. By contrast, concerns about how tariffs would affect the profitability of the semiconductor and hardware sector will linger in the near term. In the medium run, however, we think the structural growth narrative will lead these sectors higher as the supply of semiconductor components required for AI will likely continue to be limited. Relatedly, utilities could also benefit from higher power demand with the substantial expansion of AI data centers.

Trump's win is an immediate plus for banks as deregulation is likely to be a theme for the administration. Furthermore, a strong economy and the possibility of an uptick in M&A activity will all be positive for large banks. Banks were the best-performing sector on Wednesday rising by 11%.

In stark contrast, the Trump win puts the outlook for Chinese stocks in jeopardy and increases the likelihood of extremely high tariffs on Chinese exports to the US. The conclusion of Friday's meeting of the National People's Congress (NPC) Standing Committee will be watched by markets to determine whether Beijing will boost and frontload stimulus spending.

The outlook for European stocks is also less rosy as businesses fear the possibility of tariffs. The US is a large trading partner for Europe. The impact on European stocks could be limited by the fact that the majority of the products sold by European companies in the US are made in the US, meaning that only a small percentage of goods are actually exported. The exposure to China is of greater concern to European businesses.

Bonds

Expectations of stronger nominal GDP growth and bigger fiscal deficits have caused ten-year US Treasury rates to increase by about 18 basis points to 4.44% on Wednesday. Even while there is still a lot of ambiguity over whether Trump's policy program can actually be implemented or how it will affect inflation, the market seems to be taking a strong stance on its possible inflationary effects.

We believe yesterday’s moves along with the rise in bond yields since early October have made bonds attractively valued. Investors with large cash balances should look to exploit the current high yields to lock in yields for the upcoming year. Also from a portfolio standpoint, bonds are particularly appealing since they have the potential to yield substantial returns in the unlikely event that the US enters a recession.

Currencies

On Wednesday, the Dollar Index (DXY) rose 1.6%. The possibility of reduced taxes, more nominal growth, and tariffs—all of which might support the dollar—seems to be the main focus of investors.

The dollar may hold steady in the very short term, however, we continue to anticipate that the dollar will weaken over the next 12 months. The US's large twin budget and current account deficits, along with the dollar's overvaluation, will weigh on the currency. Other reserve currencies including the euro, yen, and sterling are likely to recoup the lost ground over the coming year. By contrast, the outlook for the Chinese yuan and the Mexican peso is marred by tariff wars.

Commodities

Gold fell 3.0% on Wednesday on US dollar strength and as investors flocked to cryptos. Higher deficits, geopolitical unpredictability, and ongoing central bank purchases, in our opinion, should all contribute to future gains in the yellow metal.

Oil is likely to remain under pressure from the potential deregulation in the fracking space by the Trump administration. Weaker Chinese demand is likely to balance out the risk premia linked to Middle-East tensions.