Don’t call it a comeback

Eight years ago, days before Americans were going to the polls, my local town was burning a 36-foot effigy of Donald Trump. If that were not gruesome enough, he was holding Hilary Clinton’s head and dressed in shorts. I’m not sure which is worse. 

I was Stateside around that time, picking up anecdotal evidence of America’s political leanings as I made my way from New York through North Carolina to Texas visiting friends and family. Back then, the political environment felt highly polarised. Not much has changed. After his first term, Trump lost in 2020 with very poor approval ratings. Many thought that was the end. And yet, four years later he’s back. Yet with the noise, the tweets and the court cases, it felt like he never really went away.

Going into this election the thunderous bombardment by the media, as well as stacks of sell-side research reports, ramped up. Every four years I’m reminded of just how complicated the US electoral system is: winning the popular vote – i.e. getting the most Americans to vote for you – does not necessarily mean you end up as the next President – as Hilary Clinton found out in 2016. Similarly, Presidents need to win both chambers of Congress to roll out their platform unfettered. And because of tribal voting, in many elections it comes down to a handful of ‘swing states’ – even coming down to just a few thousand votes.

So it was a big shock waking up at 4.30am to find the contest virtually over. By 5.30am Democratic candidate Harris had all but gone to bed and turned off the lights. Trump had won by a landslide, doing better across many demographics. The implications of this are wide ranging, with some obvious market reactions already, and plenty of unknowns which could have material implications.

From a US economic standpoint, the result is positive. The new administration is likely to be pro-growth, slashing regulation and extending tax cuts – with potential for more to come. Equities are therefore higher, with the mid-cap Russell 2000 index particularly strong reflecting this new environment. But some of the larger tech names are also taking comfort from a weaker antitrust landscape. Equities, I suspect, are also rallying because they had previously factored in the chance of a messy contested election (Trump called out supposed fraud in Pennsylvania very early on in the race – albeit he has not mentioned much on this since!). The likely continued support for onshoring (started by Trump and continued by sitting President Joe Biden) is likely to continue apace, providing a continued boost to the US economy as it has for the last four years. Many of those projects had been paused, but now may well restart with the clarity of a new government. 

Renewables hit hard, but Republicans benefit from them too

Not all equities are happy. Some investors fear what might happen to areas such as renewables, with Trump having singled out the Inflation Reduction Act (a key piece of legislation supporting clean energy) as something he might repeal. Various renewables stocks were under pressure the day after the election. In my view, much of the government’s fiscal support for this sector is directed at Republican states, so a full-scale dismantling of this legislation may be opposed by both sides of the aisle. Nonetheless, general sentiment for renewables may be weak for some time. We have thankfully limited exposure to US renewables, even in our Rathbone Greenbank Multi-Asset Portfolios. That’s because we tend to avoid companies that are overly reliant on government subsidies. 

On the opposite side of the spectrum, Trump has promised to ‘drill baby drill’ which is likely to be a positive for oil companies active on US shores. The flip side of this is more oil out of the ground boosts supply and potentially weakens the oil price. Of course, this must be balanced with other geopolitical considerations – Iran and Russia both being considerable producers of oil. Defence spending has always been robust under Trump, and I don’t see that changing. There may be renewed threats to pull out of NATO should European nations not meet their agreed spending targets, which should help shore up European defence budgets. Although, any tailwind there could be countered by a reduction in support for Ukraine. And any peace deal would mean yet less spending on military hardware. 

China is a perennial target of US foreign policy today – from both Democratic and Republican administrations in fact. Trump brings the potential for higher tariffs on China. He has said a levy of between 60% and 100% will be applied to Chinese goods imported to the US. All other parts of the world would attract tariffs of only 10% to 20%. The result will be a continued headwind to globalisation and free trade. The onset of new tariffs could encourage the Chinese government to increase fiscal support for its exporters. This may be why China has been coy on the full details of its recent stimulus, allowing the flexibility to go bigger should the election result in aggressive tariffs. 

Away from buoyant equity markets, US government bond yields have risen significantly. Investors are assuming a higher-growth environment driven by deregulation and potential tax cuts, as well as the impact on budget deficits from the latter. Tariffs would bring with them an inflation bump (economists estimate a 1.3% increase in CPI inflation should a 10% tariff be placed on all imports), which bondholders may also be concerned about. We had significantly reduced our US government bonds as yields fell earlier this year, given our concerns about rising yields from a Trump win. We will revisit this as yields move higher, but certainly the high chance of a Republican clean sweep (President and both chambers of Congress) gives us pause. We’ll also have to see how the new administration addresses immigration, given 8 million undocumented workers make up 5% of the workforce. If they were removed, it would affect the availability of labour and support further wage growth. 

We now return to the days we thought were behind us: waking up each morning wondering what has been tweeted in the night that might move markets. We may well see more volatility as markets try to interpret each missive. We are reminded to take the new President seriously, but not literally. The next four years might be a lot noisier, but I’m not tempted to bet against America.

Tune in to The Sharpe End - a multi-asset investing podcast from Rathbones. You can listen here or whenever you get your podcasts. New episodes monthly.