The noise really ramped up going into this election. Every four years I’m reminded of just how complicated the US electoral system is: winning the popular vote – i.e. getting the most Americans to vote for you – does not necessarily mean you end up as the next President, as Hilary Clinton found out in 2016.
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Similarly, Presidents need to win both chambers of Congress to roll out their platform unfettered. And because of tribal voting, in many elections it comes down to a handful of “swing states” – even coming down to just a few thousand votes.
The implications of President-elect Trump’s victory are wide-ranging, with some obvious market reactions, and plenty of unknowns which could have material implications.
From a US economic standpoint, the result should be positive. The new administration is likely to be pro-growth, slashing regulation and extending tax cuts – with potential for more to come.
Equities are therefore higher, with the mid-cap Russell 2000 index particularly strong reflecting this new environment. Some of the larger tech names are also taking comfort from a weaker antitrust landscape. Equities, I suspect, are also rallying because they had previously factored in the chance of a messy contested election.
The likely continued support for onshoring (started by Mr Trump and continued by sitting President Joe Biden) is likely to continue apace, providing a continued boost to the US economy as it has for the last four years. Many of those projects had been paused, but now may well restart with the clarity of a new government.
But not all equities are happy. Some investors fear what might happen to areas such as renewables, with Mr Trump having singled out the Inflation Reduction Act (a key piece of legislation supporting clean energy) as something he might repeal. Various renewables stocks were under pressure the day after the election.
In my view, much of the government’s fiscal support for this sector is directed at Republican states, so a full-scale dismantling of this legislation may be opposed by both sides of the aisle. Nonetheless, general sentiment for renewables may be weak for some time. We thankfully have limited exposure to US renewables because we tend to avoid companies that are overly reliant on government subsidies.
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On the opposite end of the spectrum, Mr Trump has promised to “drill baby drill” which is likely to be a positive for oil companies active on US shores.
The flip side of this is more oil out of the ground boosts supply and potentially weakens the oil price. Of course, this must be balanced with other geopolitical considerations – Iran and Russia both being considerable producers of oil.
Defence spending has always been robust under Mr Trump, and I don’t see that changing. There may be renewed threats to pull out of NATO should European nations not meet their agreed spending targets, which should help shore up European defence budgets.
However, any tailwind here could be countered by a reduction in support for Ukraine. And any peace deal would mean yet less spending on military hardware.
China is a perennial target of US foreign policy today – from both Democratic and Republican administrations. Mr Trump brings the potential for higher tariffs on China.
He has said a levy of between 60% and 100% will be applied to Chinese goods imported to the US. All other parts of the world would attract tariffs of only 10% to 20%.
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The result will be a continued headwind to globalisation and free trade. The onset of new tariffs could encourage the Chinese government to increase fiscal support for its exporters. This may be why China has been coy on the full details of its recent stimulus, allowing the flexibility to go bigger should the election result in aggressive tariffs.
Away from buoyant equity markets, US government bond yields have risen significantly. Investors are assuming a higher-growth environment driven by deregulation and potential tax cuts, as well as the impact on budget deficits from the latter.
Tariffs would bring with them an inflation bump (economists estimate a 1.3% increase in CPI inflation should a 10% tariff be placed on all imports), which bondholders may also be concerned about. We had significantly reduced our US government bonds as yields fell earlier this year, given our concerns about rising yields from a Trump victory. We will revisit this as yields move higher.
We’ll also have to see how the new administration addresses immigration, given eight million undocumented workers make up 5% of the workforce. If they were removed, it would affect the availability of labour and support further wage growth.
We now return to waking up each morning wondering what has been tweeted overnight that might move markets. We may well see more volatility as markets try to interpret each missive. The next four years might be a lot noisier, but I’m not tempted to bet against America.
Will McIntosh-Whyte is a fund manager with Rathbone.
