The US Election’s impact on the stock market
The US Election’s impact on the stock market
Towards the end of 2024, American citizens emphatically elected Donald J. Trump as the 47th President of the United States of America, allowing him to reside in the White House for the second time, after his first 4 years term in 2016.
In the US political history, only another US president, namely Cleveland at the end of the 19th century, had been able to win back the White House after a 4-year hiatus. A truly remarkable political comeback.
The electoral victory on the part of Mr. Trump was definite and comprehensive, with the Republican party, to which Mr. Trump is affiliated, also winning most seats in the Senate and in the House of Representatives.
A “clean sweep” on the part of the Republican party, in the jargon of American politics.
How will the US election affect the stock market?
The immediate reaction of US financial markets to the news of the election results was almost euphoric, with both stock markets and the US dollar jumping higher.
On the contrary, US Treasuries (US government bonds) registered a dip in price (yield rising), as likely reflecting concerns about the potential for increased government budget deficits and inflation because of the expected implementation of some of the policies proposed by President elect Trump during the election campaign.
At first glance, judging from the immediate reaction of the major US equity indices to the electoral outcome, investors seem to be in favour of the policies of deregulation and tax cuts which form the plank of the Trumpian MAGA (“Make America Great Again”) policy agenda.
The prospect of reducing corporation tax from 21% to 15% for companies producing goods within the US borders also bolstered investors’ sentiment.
The policies advocated during the election campaign by President elect Trump are expected to stimulate economic growth once implemented, to provide a “sugar rush” in the near term, thus helping companies to preserve healthy profit margins and to increase revenues.
Hence, the positive reception of the electoral result on the part of the US stock market.
However, at a more granular level, certain sectors might not necessarily be so enthused by some of the policies that might be implemented by the new Trump administration, such as the reduced emphasis on clean energy, renewables, and environmental sustainability, and the avowed effort to increase oil and gas output (“drill, baby, drill” as President elect Trump once famously and colourfully said).
Paradoxically, this might have a detrimental effect not only, predictably, on renewable and green energy companies, but also on the oil & gas companies themselves as an increased supply might cause the price of energy to fall in the absence of a concomitant rise in demand for oil and gas. And with the economy in the Eurozone currently quite shaky and the Chinese economy, by far the largest buyer of energy, especially oil, also not in a good state, this extra demand might not materialise.
That said, the more business friendly and deregulation atmosphere created by Mr. Trump’s electoral victory should provide a boost for US stock markets generally, at least in the short term, albeit not across all sectors, with medium and small sized companies likely to benefit the most, provided the growth of the US economy remain robust.
“Tariff man”
Mr. Trump once famously referred to himself as “tariff man” and stated that “tariff” is the most beautiful word in the dictionary.
The implementation of protectionist barriers to international trade was one of his more prominent pledges during the election campaign.
The idea is to erect a 60% tariff on all Chinese imported goods and a 10% tariff across the board on goods imported from all other countries, albeit he also singled out specifically Canada, Mexico and the EU for a 20% tariff schedule.
The avowed aim is to stimulate and protect US local industries and jobs and to raise revenue for the US government.
Apart from the very likely risk of countries retaliating by imposing tariffs of their own, thus contributing to a slowdown of international trade not conducive to economic growth, the tariff plan might well cause inflation to rise, because of the higher prices of imported goods due to the tariffs, thus hurting the American consumer.
Alongside these protectionist measures, President Trump, acting on his electoral promises, might also turn the screw decisively on immigration flows which have helped over the years to contain the pressure on wages and contributed to companies’ profitability.
Reduced immigration levels might cause wage growth to accelerate due to scarcity of labour, thus prompting companies to pass on to consumers the higher labour costs, another potential inflationary source.
The proposed tax cuts, if not counterbalanced by spending cuts, might cause the government deficit, currently standing at around 6% of the size of the economy as measured by Gross Domestic Product (GDP) to increase even further from already historic highs during periods of very low unemployment.
This would cause an increased supply of US Treasuries on financial markets at the same time when investors might be less willing to buy US government bonds due to possible concerns regarding the long-term sustainability of US public finances.
Inflationary risk and perceived fiscal indiscipline are a mix that might create a severe headwind for US Treasuries, causing their prices to fall and yields to rise.
This negative scenario for US government debt might in part be alleviated by the US central bank (colloquially known as the “Fed”) expected to cut interest rates at least couple of times next year, thus providing support for the price of US Treasuries.
However, the risk of inflation flaring up again as a possible consequence of the policies implemented by the new Trump administration might cause the Fed to slow down the pace of interest rates reduction. The prospect of interest rates remaining higher for longer probably impacted investors’ sentiment by year end, with US financial markets having a wobble in December and no “Santa Claus” market rally taking place in the last 2 weeks of the month.
That said, one should remember Mr. Trump, in his former businessman capacity, is the author of the book “Art of the Deal”, and the plan of slapping high tariffs on imported goods might just be an opening gambit in dealing with foreign countries, specifically China, in order to force them to avoid the risk of elevated protectionist barriers by physically investing directly in the US in terms of building new factories there.
It sounds like a quite high-risk strategy; however, the inflationary consequences of the envisaged protectionist policy might turn out to be more muted than expected.
On this account, only time will tell.
Overall, discounting unpredictable developments in the geopolitical field, although more volatility is expected in the US Treasuries market, the investment community seems to have welcome the outcome of the presidential election.
The US stock market is expected to deliver positive returns at least in the near term, albeit not all sectors might benefit equally by the proposed policies once implemented, fully or partially, by the newly installed Trump administration.
Looking for expert advice from a local financial adviser?
At KLO Financial Services, we offer expert personal financial planning, financial portfolio management and investment diversification strategies. Our team of independent financial advisers is here to help you plan ahead and secure the life you want and deserve.
To speak to one of our personal financial advisers in London, Birmingham and Warwick, call 01926 492406 or email enquiries@klofinancialservices.com
Disclaimer
Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested. Past performance cannot be relied upon as a guide to future performance. KLO Financial Services Ltd are registered in the UK, company number 08711328. We are authorised and regulated by the Financial Conduct Authority, reference 710272. For any information please visit our website www.klofinancialservices.com