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The U.S. presidential election has been decided, with voters giving Donald Trump a return ticket to the White House. Importantly, the U.S. managed to avoid what markets feared the most: a contested election and prolonged uncertainty, which could likely have resulted in a significant selloff. Instead, we have a decisive victory. Markets like clarity, and I expect them to reward this in the short term.
President-elect Trump will have a Republican Senate majority to support him in achieving his agenda. The Senate is considered the “HR department” that votes to confirm presidential appointments, and this Senate will likely serve as a rubber stamp for Trump. This could add some uncertainty for the Federal Reserve (Fed), given the potential for Trump to nominate non-traditional candidates for seats at the central bank, especially the Fed Chair.
As I write this the morning after the election, the House of Representatives remains a toss-up at this point. I think whether or not there is a divided or unified government, stocks are likely to make gains in the near term. (The Dow Jones Industrial Average gained 3% on the election news.1)
The key items on Trump’s agenda – immigration and tariffs, as well as deregulation – generally do not need legislative action, so the composition of the House of Representatives is largely unimportant to the implementation of those policies. Trump can move ahead with those as soon as he takes office.
On the campaign trail, Trump suggested that he will not apply his proposed tariffs immediately. Rather, he may merely threaten them and then negotiate. It’s also possible that tariffs could be applied only very temporarily. This would be somewhat similar to what we saw in the first Trump administration with significant volatility and short-term selloffs followed by recoveries as the tariff wars played out. (And if tariffs are only threatened or are short-term in nature, I don’t believe they would have a material impact on inflation even though they are anticipated to be as large as 60% for Chinese goods.2)
In terms of immigration, Trump has pledged to begin deportation of 15-20 million illegal immigrants immediately. If this were to come to fruition, it could be very inflationary since the labor market is already tight and some industries have labor shortages. However, the Fed would be unlikely to react with monetary policy changes until inflation shows up in the data, which could take time. Higher wage growth could trigger a Fed slowdown in rate cuts. (Inflation break-evens have risen, suggesting that higher inflation could already be a concern for markets).
Trump is likely to focus his legislative efforts around an extension of the Tax Cuts and Jobs Act as well as a cut in corporate taxes. I would expect this to be very positively received by markets, and that’s likely why markets rallied immediately after the election; they are anticipating lower taxes and less regulation in the U.S.
Markets clearly believe U.S. economic growth will be amplified by Trump administration policies. We can see it in the results of the Russell 2000 Index, which was up more than 4% just a few minutes into the Nov. 6 trading session.1 However, I still believe support for stocks is more about Fed easing supporting growth. (And the Nov. 7 Fed decision will re-focus investors on monetary policy.) As a reminder, U.S. assets tend to do well in the year after an election (especially stocks).3 And U.S. stocks have tended to do well when the Fed eases but a recession is avoided.4
From my perspective, the big market issue facing the new administration is going to be bond vigilantes – bond investors who threaten to sell or avoid buying bonds in order to protest the policies of bond issuers (in this case, the U.S. government).
There is an expectation that Trump’s policies will result in larger fiscal deficits, and bond investors are already showing signs of impatience with U.S. government spending. U.S. Treasuries are no longer seen as the “safe haven” asset class of choice that they once were, and we could see yields rise in a way that makes deficit spending increasingly difficult. Thus far, the rise in yields looks to be mostly related to inflation break-evens, but the fiscal situation is also playing a role; I believe rising fiscal deficits will become an increasingly larger concern for investors.
In summary, we have seen an outsized reaction in markets – likely due to the “positive surprise” of avoiding prolonged uncertainty and realizing a decisive victory by the candidate whose policy platform includes tax cuts and deregulation. However, it does feel to me like the euphoria for U.S. stocks is somewhat overdone, and there could be some retracing in the near term, just as we saw in 2016. Ditto for the selloffs in European and U.K. equities; I think they are also overblown, and there could be some retracing.
It will likely be up to the Fed to help support a sustained stock market rally, so we will want to look to Fed Chair Jay Powell for clues as to what might cause the Fed to slow down or even pause its easing cycle. My base case remains an economic re-acceleration next year for the U.S. and most other major economies, which should be supportive of risk assets. I anticipate small- and mid-cap stocks to be particular beneficiaries of this environment.
Kristina Hooper is Chief Global Market Strategist at Invesco. This article first appeared in the Invesco Insights – Markets and Economy page. Paul Jackson and Brian Levitt of Invesco contributed to this article
Notes
1. Source: Bloomberg, L.P. as of Nov. 6, 2024
2. Source: PBS: “Trump favors huge new tariffs. How do they work?” Sept. 27, 2024
3. Sources: Sources: ICE BofA, S&P Dow Jones Indices, LSEG Datastream and Invesco Global Market Strategy Office, Oct. 31, 1987, to Oct. 31, 2024.
4. Sources: Federal Reserve Economic Database (FRED) and Bloomberg L.P., Aug. 31, 2024.
Based on average S&P 500 Index performance 12 months before and 12 months after the beginning of the past 16 easing cycles in 1970, 1971, 1973, 1974, 1975, 1980, 1981 (two cycles that year), 1982, 1984, 1989, 1995, 1998, 2001, 2007, and 2019.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Nov. 6, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
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