November 2024
Market Commentary
President-elect Trump 2.0
(3 min read)
12th November 2024
I think it is fair to say that Donald Trump took the mainstream media by surprise with his ‘clean sweep’ election victory last week. Trump has taken control of the White House, the Senate, and the House of Representatives and by a convincing margin.
Ideology shift
This leaves Trump’s administration with a clear mandate: to reduce regulation and cut government spending, Elon Musk thinks there is a potential USD 2trn of savings to be had, to restart drilling for oil and gas at the expense of renewable projects, to increase tariffs on imports and to cut taxes for individuals and corporations. This a huge shift in ideology from big government, tax and spend under Biden, to small government in the form of lower taxation and a reduction in spending.
Market reaction
President-elect Trump inherits a strong economy, with low unemployment and a vastly improved inflation position. However, the government deficit, see Chart 1., is at its highest level in modern history and unsustainable over the medium term. The bond market has given Trump the benefit of the doubt so far as yields have risen modestly in line with a more cautious assessment by the market on how far interest rates can fall over the next 12 months.
For markets to accept the proposed scale of tax cuts, the new administration will need to be successful in revenue raising from tariffs and make significant efficiency improvements in the public sector. However, for now at least, the markets have discounted the prospect of a strong domestic and private sector driven growth outlook, benefiting both large and small companies. The S&P500 has rallied almost 5% since the election result, see Chart 2., with the market performance broadening to smaller caps and sectors other than large technology.
Central bank responses
The increase in bond yields reflects a continued strong growth outlook, potential fiscal profligacy and renewed inflationary pressure and consequently a Federal Reserve less inclined to cut interest rates to the extent the market had been pricing previously. The Bank of England also might be forced to follow suit and be more cautious on future interest rate cuts.
How does this affect me?
We believe that the outlook for stock markets remains positive but, and as usual, there are lots of moving parts to worry about. For our clients, ahead of the US election we had already taken action on portfolios by reducing our exposure to longer dated fixed income in favour of alternative strategies with low volatility and by reducing further our weighting to large cap stocks in favour of small caps in both global and UK funds.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Chart 1. US Government Debt as a % GDP
Chart 2. S&P 500 Since US Election
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