The majority of the market focus in November went on the US election, held on 5th. The result was determined faster than expected with a convincing win by Donald Trump. Furthermore, the full Republican control of the Senate and House, assured the market that more of the tax cutting and deregulation policies proposed by the Trump campaign would have success in being implemented. The result led to an equity market bounce and move to a “risk-on” stance from investors. US equities saw significant outperformance against peers.
The expectation for higher inflation, and potentially higher government bond issuance, initially caused bond yields to rise. Higher inflation may make the Federal Reserve reticent to cut rates as fast as they otherwise would have done. The US dollar strengthened.The magnitude of the moves so far has been significant but not excessive, the main US indices have risen around 5% and the 10 year US Treasury yield has since fallen back following the initial rise. While these shifts were notable, over the span of a quarter, or a year, they will easily be lost in wider volatility.
Since the election, focus has shifted to the Presidential picks for key positions. So far, the choices are likely to lead to significant change, both domestically and in foreign policy. Alongside tax cuts and broad deregulation across sectors, a focus on drilling more oil domestically is likely. This has the potential to bring down energy costs globally, suppressing inflation and acting as an economic stimulus. However, this may take time to make an impact.
A potential area of concern is China, which is likely to be the primary target of the Trump tariff policy. While the exact strategy is yet to be refined, import costs into the US are likely to increase, weighing on bilateral trade between the world’s two largest economies. Europe is likely to be hit with additional tariffs too. Global trade flows and inflation (both positive and negative in different regions) will be factors to watch.
Overall, a Trump presidency will lead to a number of policy changes which will impact the US, global economy, and markets in different ways. Investors should be anticipating greater political volatility and expect more frequent market reactions to political events, both positive and negative.
