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Perspectives

Issue 110: Republicans Win Big

November 11, 2024

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This Week’s Highlights

  • Trump cruises to reelection in 2024
    Seeking an explanation for last week’s action in stocks, bonds, currencies—it pretty much all comes down to the surprisingly strong win Republicans scored in last Tuesday’s election. But what does a possible GOP sweep mean for the economy and markets going forward?
  • FOMC brings expected 25-bps cut
    In his remarks after the Fed put in its expected quarter-point rate cut, chair Jerome Powell reaffirmed that Trump’s election won’t force him out before his term ends, though bond prices suggest the former president’s policies will have an impact on inflation and rates.
  • Considering BoE, ECB, and others
    Turns out it wasn’t just the US making a move in monetary policy last week, with England’s and Brazil’s central banks easing and tightening, respectively. The ECB and BoJ weren’t meeting to set policy last week, but traders were mulling each bank’s likely December move.

The CIO’s Take:

  • While it’s not really our place to weigh in on what went wrong for Democrats last Tuesday—and we don’t have space to cover it all, in any case!—we’re more than prepared to speculate on what it means for investors’ portfolios, with our most confident prediction being a short-term boost in risk assets, but higher inflation in the longer-term.
  • Despite some bluster about firing Jerome Powell when he was on the campaign trail, we believe Trump will let the current Fed chair serve out his term. That doesn’t mean his policies won’t interfere with the Fed’s inflation endgame, as mass deportations, tariffs, tax cuts, and plenty of spending put upward pressure on a range of prices.
  • It’s one thing for the Fed to grapple with a potentially disruptive change of power in the US: other nation’s central banks are forced to deal with their own macro reality and react to what America’s doing. That could lead some monetary policymakers to front-load rate cuts and preempt the hit to growth of another round of “America First”.

Republicans Win Big

Clear mandate for GOP
A week ago, we highlighted the US presidential election as a major source of uncertainty that we would be happy to have resolved. Despite concern that it might take a while to tally votes in a race some expected could come down to a few thousand votes, resolution was surprisingly fast. Not only did Donald Trump win back the White House, but he did so in a resounding way, with the former president sweeping all seven ‘swing states’—including the entire ‘blue wall’—Republicans taking the Senate, and now odds-on favorites to secure the House, as well.

 

What’s the portfolio impact?
We’ll leave the post-game analysis on the political side to the pundits who will surely be debating what went right for Trump—and went so stunningly wrong for Harris and the Dems—but we will spend some time this week breaking down the implications for the US economy, the markets, and clients’ portfolios. We’ve already highlighted some of the expected effects in our commentary over the last few months, though now we have certainty as to who won, as well as asset prices’ immediate reaction to Trump’s decisive victory as another data point to consider.

 

Boosts to growth, inflation
There’s a pretty strong consensus among economists on the broad strokes of Trump’s economic plan (though the “plan” has been subject to some contradictions, in parts, along the campaign trail). On the bright side, we expect Trump to promote lower taxes and deregulation, both of which markets like; tariffs will also factor heavily in Trump’s economic policy, as will stricter rules on immigration, each of which will likely serve as a headwind to growth. All of these things, are likely to drive bigger deficits and higher inflation, which we see as two of the biggest risks of Trump’s second term.

 

Stocks love the Trump win
In the immediate aftermath of the election, markets moved to price in the near-term impact of a Trump victory. Stocks boomed, as the Dow ended the week up 4.6%, the S&P 500 rallied by 4.7%, and the NASDAQ finished 5.8% higher for the week. The net worth of the world’s ten richest people, tracked by Bloomberg, surged by a record $64 billion in the day after Trump’s reelection, led by a $26.5 billion gain in the holdings of Elon Musk, one of the former president’s most vocal supporters. Stocks tipped by Bank of America to benefit from a GOP victory spiked disproportionately (see below).

Figure 1 Trump Trade Stocks Rally

Among stocks in the Republican basket depicted above are Industrials, including defense contractors and private prisons, and also a heavy allocation to Financials, expected to benefit significantly from deregulation: especially shares in crypto-related businesses, after Trump’s pivot to strong support for digital currencies this time around. The Dem portfolio featured a big weight in Health Care—think managed care providers and weight loss drugs—but renewable energy stocks have been flagged by many analysts as likely to be some of the biggest losers when Trump retakes office.

 

Markets may not follow a script
On the other hand, Bloomberg commentator Simon White recently advised investors to look past the short-run post-election volatility and consider what actually happened over the last couple election cycles. Health Care stocks that were expected to do so well when Biden took the reins have been the S&P’s second-worst performed over his term—next to utilities, also expected to fare better with a Democrat in office. In Trump’s first term, market pundits expected value stocks to benefit from “America First”; instead, what we got was a record-breaking growth rally.

 

Politics produces plenty of noise
As we said last week, there will be winners and losers as the dust of 2024’s US elections settles and Trump’s policies play out on the domestic and international stage, but some of the biggest losers will likely be those trying to time the market, rather than sticking to a diversified long-term investment plan. To be sure, we expect there are tactical opportunities brewing—particularly when it comes to risks like tariffs and inflation—but we see those more as measured tilts in exposure, rather than bold bets on a certain outcome in what we fully expect will be an unpredictable four years.

Fed Cuts 25 bps

No surprise from FOMC
One of the somewhat awkward aspects of the election as it related to economics was the presence of an FOMC meeting on the calendar last Thursday, just a couple days after voting ended. Thankfully, unlike in the race for the White House, there was almost no uncertainty as to the Fed’s next move, with the US central bank delivering on what investors strongly assumed would be a 25-bps cut. That brought rates to a range of 4.50-4.75%, after a jumbo half-point cut at September’s FOMC, which saw the Fed finally pivot to easing.


Officials see risks in balance
In his post-meeting remarks, Fed chair Jerome Powell pointed to “strength in the economy and labor market” and confidence in “inflation moving sustainably down to 2%” as motivating the continued “recalibration” of the bank’s policy stance, emphasizing again the balance in risks to each side of its dual mandate. As for the labor market—an area where markets have begun to have deeper concerns—Powell also saw conditions “essentially in balance”. Markets read Powell as moderately backing another 25-bps cut at December’s FOMC, now priced with roughly two-thirds likelihood.

 

Will Trump’s win impact Fed?
Not surprisingly, Powell was questioned as to whether he worried for his own job, given Trump’s apparent desire to hit him with an Apprentice-style “You’re fired!” after inauguration day. Powell was quick to shoot that notion down, reminding reports that Trump isn’t allowed under the law to dismiss the Fed’s chair until his term is up in May 2026. Powell also commented that “in the near term, the election will have no effects on [the FOMC’s] policy decisions”, though a look at how yields have reacted to the election might lead one to question that (see below).

Figure 2 As Stocks Rally

We’ve already remarked on that jump in the S&P 500, but it’s clear that bonds had a different reaction to Trump’s surprising strength in the election. Indeed, those concerns around the budget deficit and future inflation we referenced before pushed yields on 30-year Treasuries up by as much as 23 bps in the immediate wake of votes being tallied, their largest daily rise since 2020. That rally in yields underscores a fear on the part of investors that Trump’s policies may be a short-term boost to the economy, but risk spurring inflation and throttling Fed easing in the longer-term.

 

Election leads to dollar rally
All of that translated into FX markets, as well, with the dollar rising to its highest level in a year versus major currencies before pulling back. We’ve commented before that Trump’s inclination toward protectionism would support a stronger dollar, and that effect was apparent in especially strong downward moves in the Mexican peso and Chinese yuan, representing countries likely to be particularly hard hit by tariffs. A stronger dollar doesn’t help emerging markets, though we note that a good deal of pessimism was already priced in well before the election, in any case.​

Int’l Monetary Moves

BoE sees inflationary budget
The past week also brought plenty of action in central bank policy outside the US, including a move by the Bank of England (BoE) on Thursday, lowering its Bank Rate by 25 bps to 4.75%. That was the BoE’s second such reduction this year, supported by all but one member of the BoE’s Monetary Policy Committee, Catherine Mann, who voted for a hold. Looking ahead, we see risk the pace of cuts could slow, as BoE forecasters believe new Finance Minister Rachel Reeves’ recent budget could boost inflation (see below).

Figure 3 Bank of England Forecasts

Expect ECB to accelerate cuts
The ECB has already cut rates three times this year, with the last of those coming in October, bringing the deposit rate down to 3.25%, with inflation right at the bank’s target and concerns over growth at the forefront. Although the pace of easing has been brisk, thus far, a number of ECB officials have recently expressed caution and pushed for a more gradual approach. To the contrary, we think there’s a good chance Trump’s reelection—and the threat tariffs present for Eurozone growth—could actually boost the odds of faster ECB easing in the short run.

 

BoJ looking cautious on hikes
Turning to Asia, last Wednesday brought minutes from the September Bank of Japan (BoJ) policy meeting, at which rates were held in place at 0.25%, as the central bank pursues restrictive policy in the midst of reflation and a growth recovery. Given the last week’s developments, it’s no surprise global economic uncertainty played into several members’ caution with respect to putting in further hikes. There was also concern around yen volatility, which has improved recently. We continue to expect policymakers will emphasize growth and that future BoJ hikes won’t be too fast.

 

Brazilian rates still on the rise
Like the BoJ, the Central Bank of Brazil has also been in tightening mode, raising the nation’s Selic rate by a jumbo 50 bps at its Wednesday meeting, following up a quarter-point cut back in September. That left Brazil’s key policy rate at 11.25%, reflecting an attempt by the central bank to stabilize the economy and bring currently excessive inflation back on target. Robust economic growth has boosted inflation expectations—presently sitting at 4.6% for 2024—with restrictive policy weighing on Brazilian stocks, down over 4.7% year-to-date, against a 13.9% gain for EM as a whole.