US election: What does Trump's victory mean for markets?

At a glance:

• Donald Trump’s policy promises such as increased tariffs could cause inflation to rise.
• We expect to see short-term market volatility, but do not act on speculation. We remain anchored to our long-term investment views.
• It is important to avoid a knee jerk or emotional response after such a divisive election.

After a close fought race, Donald Trump is poised to become the 47th President of the United States. Looking at Trump’s campaign promises, as well as his actions during his last presidency in 2017, expectations are for reduced regulations across the board. Additionally, expectations are he will focus on immigration and a greater use of tariffs in international trade. How this will play out and be received by markets remains uncertain.

The 2024 election has been a divisive one. With so much noise, it is bound to impact. We remain focused on delivering long-term investment outcomes and maintain conviction in our current positioning. We think making bold calls on the future based on a single event can lead to poor decisions.

Role of Congress

It is also worth considering the roles the Senate and the House of Representatives (combined known as Congress) play in US politics when discussing Presidential elections.

American politics is built on a system of checks and balances, which is why control of these two branches of government are key to the policies a new government can introduce.

When he was the 45th president, Trump made strong use of executive orders, which do not necessarily need approval by Congress. Such orders by US presidents have historically related to routine administrative matters. More recently they have been used for more significant policy changes. Trump signed 220 executive orders between 2017 and 2021. This compares to 277 executive orders signed by President Barack Obama between 2009 and 2017.¹

Additionally, the US holds mid-term elections in 2026 so the composition of Congress may change again soon.

Potential inflation

Trump last came to office in 2017, during a period of prolonged low inflation. Today is quite different. In 2021 and 2022, inflation soared to 1980’s levels and peaked at around 9%². It has since come down. By October 2024 US inflation was close to the Federal Reserve’s (the Fed) 2% target. Still, it is being closely – and warily – watched.

In 2017, Trump made the use of tariffs in international negotiations to try and reshore manufacturing into the US. Given his campaign messaging, more tariffs appear likely. Tariffs can have an inflationary effect, as companies tend to pass on costs through price increases.

Looking ahead slightly further, Fed Chair Jerome Powell’s current term in office ends in 2026. As Chair, Powell’s policies are key to keeping inflation under control. With Trump potentially preferring an alternative Fed Chair, policy uncertainty could increase further.

Fixed income

There is potential for higher short-term volatility in bond markets in the aftermath of the election. We think this is particularly likely around US Treasuries as sentiment adjusts to the result.

Possible higher inflation may also cause yields for long-term bonds to rise higher than short-term bonds (a steepening curve). This is sometimes seen as a signal for the start of a strong economic period. However, it can also indicate a time of higher interest rates.

As the US remains the benchmark for global fixed income, the broader global bond market may feel the ripple effects of this. We will continue to monitor these markets carefully and will adjust positioning should there be a material change in the outlook and opportunity set.

Impact on equities

Given Trump’s focus on international negotiations, sectors tied to international trade – particularly tech and consumer goods – may experience more volatility. On the other hand, the president-elect’s emphasis on deregulation and corporate tax cuts may well give short-term boosts to industries like traditional energy, financials, and defence.

US smaller companies (small caps) could be more affected by any post-election volatility but we believe this to be a short-term concern. In our view, the valuation case for global small companies is currently strong and we expect over the medium-term US small caps will do well. We will continue to watch this space with interest as Trump’s campaign promises materialise.

Managing risks

Elections, particularly ones as contentious as this, have a way of stirring up short-term market volatility. However, history has shown it is unwise to make significant adjustments based on political events. Market volatility is often based on speculation and not any change to fundamentals.

At times of heightened uncertainty, it is important to remain faithful to our investment principles and process. While elections may create temporary volatility, we believe remaining disciplined and building a diversified portfolio is the most effective means of delivering long-term value. It is important to remember the main risk from market events is the poor decisions we can make when they occur, rather than the ramifications of the events themselves.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The information provided does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions.

Source

¹ Federal Register, data accessed 05/11/2024

² US Bureau of Labor Statistics, data accessed 05/11/2024

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