After months of campaigning, supported by hundreds of millions of dollars of funding, wall-to-wall social media and television advertising, a change of candidate on one side and an attempted assassination on the other, the US electorate has spoken, defying the polls with an unequivocal verdict; a second four-year term for Donald Trump.
Whatever one’s personal views, a clear result removes the risk of weeks of wrangling and a hiatus in government and corporate decision-making. However, a Republican clean sweep of the White House, Senate and House of Representatives will give Trump virtually unchecked power to follow his agenda.
What are the potential consequences for financial markets?
Trump won the popular vote with promises to cut income taxes, corporate tax, impose big tariffs on imports and close US borders to immigrants. The first of these is designed to put more money in people’s pockets, but by increasing demand, it is innately inflationary in nature. Likewise, both tariffs and closing the border: the former swapping the lowest-cost global supplier with a more expensive domestic producer; the latter ending a cheaper supply of labour, sending aggregate wages up.
All this at a time when the data suggests inflationary pressures were already ticking higher. It is the reason US bond yields have moved higher after the result, extending recent falls in bond prices (prices and yields move in opposite directions), discounting both higher inflation and an increase in already mushrooming government debt to pay for the tax giveaways.
A long-term approach to investing
In brief, the outcome is good for US equities, particularly domestically focused businesses, but not good for fixed interest securities, particularly US government debt. When the dust settles though, the longer-term macro considerations centre around the risk of a reemergence in inflation, implying interest rates not falling as fast as previously expected, and government debt exploding higher, with the cost of servicing this becoming an ever-bigger burden on the economy.
In the post-war period, only George W. Bush had to endure a negative stock market performance between 2000 and 2008. His two terms in office were marked by the dot.com bubble and the collapse of the US housing market, which led to a global financial crisis (see table below). During all other terms, investors were able to make money with stocks – regardless of which of the two parties the incumbent president belonged to and how Congress was composed.
In the long-term, share prices are driven by fundamental data – i.e., by the economic outlook and profits of companies. With regard to the economic outlook, lower taxes support consumer demand and lower corporate taxes are good for businesses, providing a tailwind to US equity markets. The slight nuance is that tariffs might act as offsets, and that a stronger dollar is unhelpful for big multi-nationals competing abroad.
Ultimately, it is not very productive to make your own investment strategy dependent on the outcome of political events. Investors are best off sticking to the long-term strategy they have set, and adhering to the principle of ‘time in markets’, rather than ‘timing’ markets.
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This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
