Before the elections, the polls suggested a very tight race. Instead, we've seen a red sweep. While the House results are still pending, the Republicans have secured control of the Senate. They also hold a strong position in the House, and of course, Trump is back as president – an emphatic result that we didn’t have to wait long for. The market has reacted swiftly to this outcome. However, the results for both the Senate and the House are narrow in terms of control, which is significant. This means the red sweep, while strong, faces significant obstacles in terms of enacting policy. This is a reminder that the US constitutional system remains intact – despite some of the election rhetoric suggesting otherwise.
Let’s start with growth. Despite the rhetoric, Trump’s previous term saw him acting as a fairly traditional pro-business Republican who favours deregulation. This time, with more of his own people in positions of influence, we expect a continuation of that approach: pro-business, pro-low taxes and overall, pro-growth. The US economy is currently in reasonably good shape, not due to government finances, but because both households and corporates have strengthened - their balance sheets have improved over the past 15 years, and fears of a hard landing have receded. This puts the US on a stable growth track, and Trump’s likely policies should help to underwrite that trend.
On fiscal policy, both candidates are fiscally incontinent, and there’s not much appetite to rein in government spending. However, with Trump in the driving seat, there is a risk that the US fiscal position could deteriorate further than it might have under Democratic leadership. Keep in mind US federal debt now stands at 126% of GDP – well above the 100% threshold where debt levels typically become problematic. This is something to watch, though good growth could help ease the impact of high government debt.
We also think that inflation will settle at a structurally higher level than we’ve seen in the past, in line with the shift in the inflation and interest rate cycle. The US inflation rate is likely to average around 3%, rather than the Fed’s target of 2%, due to the inevitable trade-offs that arise.
Labour markets are currently tight, reflecting a global shift from labour surpluses to labour scarcity, even in key economies like China. If Trump is effective in removing illegal immigrants and reducing the flow of immigrants, US labour markets will remain tighter than they otherwise would.
The likely outcome is more capital investment. Companies are already investing more to address labour shortages, and we expect that trend to continue. With persistent wage inflation, firms will face pressure to improve efficiency rather than focusing on share buybacks. This shift towards efficiency-driven investment is positive for long-term, supply-driven growth, as opposed to growth fuelled by low borrowing costs and rising consumer debt.
We’ve already seen the equity market in the US start to broaden out. I'm not convinced the outlook is going to be as propitious for the Magnificent Seven as it has been. A broader market is ultimately a healthier market, and the early market response told a story: US small-cap stocks, which have been underperforming, saw a strong rebound. This implies that more cyclical stocks, which have struggled recently, may gain momentum in an environment with higher nominal growth rates.
It’s important to remember that predicting sector performance over a presidential term is challenging. During Trump’s first administration, which was anti-big tech, technology still emerged as the winning sector. Similarly, under Biden – who prioritised climate policy - energy stocks performed well (up to the end of August). Looking ahead, much will depend on Trump’s key appointments. Both parties have become increasingly sceptical of big business, so if someone like Robert Kennedy Jr. were appointed as an ’antitrust tsar’ tasked with curtailing large companies, we should pay close attention to companies in sectors like healthcare and digital platforms.
Each presidential election generates enormous media attention, yet the subsequent market responses often diverge from expectations. Ultimately, market performance relies more on underlying fundamentals - earnings, liquidity and so on – than on political outcomes. This is particularly true when the presidency is gridlocked, meaning the incumbent party lacks total control of the Senate or the House and faces constitutional checks – which, of course, is deliberate.
In the short term, though, the impact can be meaningful. As uncertainty recedes, growth assets, especially in the US, tend to rebound. That’s understandable, as shorter-term market participants typically respond to uncertainty by reducing their exposure. Currently, we are seeing a shift back into risk assets. The outlook remains constructive for equities, while bonds face some challenges. This is despite the fact that short-term rates are likely to continue to reduce as inflation is, for the time being, likely to be pretty well-behaved.
Internationally, the response is also logical. For instance, we have seen emerging markets retreat, which is understandable given the uncertainty that Trump’s policies bring, particularly for countries like Mexico and China. However, healthy growth in the US creates demand for the global economy, and China, along with other emerging markets, is likely to respond with additional fiscal stimulus. This underpins growth, and improved growth prospects naturally benefit earnings.
So, I think we're still in an equity-driven world. Initially, this may favour the US, but the true value is likely to lie outside of America, though it may take longer for that to materialise.
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