Commentators may have been expecting a tight race for the White House, but Donald Trump has quickly and conclusively beaten Kamala Harris to secure his second presidential term. At the end of a long, highly eventful campaign, the Republicans have now won both houses of Congress in a “red sweep”.
This somewhat unexpected outcome means that Trump is now in a position to implement his economic proposals: tax cuts and deregulation, seen by many as growth friendly. But many are fearful that such policies will increase inflation risks.
The US Treasury bond market reacted immediately to the win –prices fell sharply and yields rose. But the market stabilised after a better-than-expected 30-year Treasury bond auction.
The most notable uptick was in the US equity market. For the first time ever, “Trump Trade” pushed the Dow Jones Industrial Average Index beyond the 44,000 barrier. Similarly, the S&P 500 Index briefly traded through the 6000 barrier, registering its own record. Overall, the S&P and Dow Jones registered weekly gains of 4.66% and 4.61%, respectively. In fact, both indices notched up their best weekly gains since November 2023.
More impressive, however, were the gains registered on the tech stock-driven Nasdaq and US small caps, which climbed by 5.74% and 8.57%, respectively. All evidence would suggest that US indices have been significantly buoyed by Trump’s victory and his “America first” policy.
One other important development gave impetus to the US stock market this week: Fed chair Jerome Powell's announcement that US interest rates would be cut by a further quarter percentage point to a range of 4.5% to 4.75% (down from its current 4.75% to 5% level). Powell even went so far as to say in his press conference that he was “feeling good” about the US economy.
Needless to say, many commentators out there are warning that the US market has moved too quickly, and valuations look overextended. We have entered “overbought” territory, they are saying. They could well be right in the short term. But there is a great deal in the way of positive momentum behind the rally and we may even see Wall Street accelerate further as we near the end of 2024.
During Trump's first term in office, the S&P 500 Index (the broadest measure of the US stock market) delivered a return of 67%. Interestingly, during Obama's first term, after the S&P hit rock bottom in March 2009, the index delivered a return of 85%. And under Clinton, it rose 79%. Clearly, it pays to be invested over the long term. In fact, over the last 123 years, through wars, recessions, bear markets, flash crashes, financial crises and pandemics, US stock markets have continued their inexorable rise, delivering an annual compounded growth rate of just over 10% per annum.
Here in the UK, the Bank of England cut interest rates for the second time this year in a move that was widely expected by economists and the markets. The Monetary Policy Committee unanimously voted to reduce the cost of borrowing by 25 basis points to 4.75%. Following a period of elevated interest rates designed to tame inflation, the UK central bank has decided to continue with its loosening monetary policy. This is despite the significant increase in government spending announced in the budget earlier this month, and concerns that it might be mildly inflationary.
House prices hit a record high in October, according to Halifax, UK's largest mortgage lender. But mortgage costs could remain higher for longer in the wake of the recent budget, it warned. The increase in fiscal spending, some commentators believe, will slow the speed at which the Bank of England cuts its interest rates.
While Trump's victory has been positive for the stock market, it does increase the likelihood of a global trade war. And as an open trading economy, the UK could be badly hit. The US is the UK's single largest trading partner: that relationship is worth in excess of £300 billion per year and is vital to our economy. It is particularly important during this current post-Brexit period as relations between the UK and the European Union undergo something of a reconfiguration.
In Europe, meanwhile, concerns over what impact the incoming White House administration's trade policies will have on European economic growth and central bank policy are also weighing heavily on market sentiment.
China is bracing itself for four years of volatile relations with its largest trading partner and rival. Although Chinese president Xi Jinping has congratulated Trump on his victory and reaffirmed that the two countries must enjoy cordial relations in this new era, it is difficult to imagine how this might be possible.
While on the campaign trail, Trump threatened tariffs of 60% on all Chinese imports. This could affect $500 billion worth of goods. Furthermore, the US has reportedly ordered Taiwan Semiconductor Manufacturing Company Limited (TSMC – the world's most valuable semiconductor company) to halt shipments of advanced chips to Chinese customers. These chips are often used in AI applications.
It's never a good idea to allow politics to influence your portfolio. Tune out the noise and focus on your longer-term goals and objectives. These underlying economic trends were already in place before last week's election. They are likely to continue for some time, and investors should avoid the urge to change strategies or fine-tune their portfolios – based on one (admittedly major) election outcome.
In the US, most companies will be able to adapt to different policies – as they have done countless times in the past. During Trump's first term as president, Wall Street prospered. And as the world braces itself for his second term, a powerful force is emerging that will be a huge driver across a wide range of sectors over the next decade, securing positive investment returns for the markets: artificial intelligence.
As far as asset allocation is concerned, cash is already earning you less than it was a week ago. This trend is likely to continue. We still believe in the bond markets – they can provide you with diversification. But short-duration bonds are preferred.
We have seen a significant spike upwards in most global equity markets since the markets bottomed out in October 2022. We believe that this bull market has further to go, so we would still support an allocation to quality US equities relative to the rest of the world. And as far as sectors are concerned, we favour technology, industrials, financials and healthcare, as well as areas of the market that will benefit from the widespread rollout ofAI.
