Aoifinn Devitt – Senior Investment Advisor – Family Office
As we digest the moment that a nation has been waiting for – there is one feeling that is universal – certainty. After many cycles of disputed elections, a decisive result brings closure, and US markets are opening Wednesday with a flurry of activity.
Weeks ago we published a table showing the potential winners and losers in a so-called “Trump trade”. Digging into these numbers a little more – we already have the market’s knee-jerk reaction – and it is broadly tracking those forecasts. Stock markets are indeed moving positively – potential tax cuts, deregulation and the traditional pro-market Republican policies have already sent markets up around 2% this morning. The prospect of new tariffs and an “America first” stance on trade has already had an impact on trading partners such as China and Mexico (and their respective currencies), which are all weaker this morning.
We are often told to heed the bond market, especially when it diverges from the equity market, and the stark rise in the yield of 10-year US treasuries – which, as we write, has risen by almost 20 basis points – its biggest daily gain since September 2022 – suggests concern.
The rise in yields suggests that the market expects more inflation, a rate cycle that is higher for longer and a rising budget deficit.
It is worth recalling that the recent analysis by the Committee for a Responsible Federal Budget had as a central case Trump’s policies adding $7.75 trn to the budget deficit, driven by tax cuts and offset largely by tariff revenue and cost cutting. A rising budget deficit tends to undermine faith in fiat currency and could bode well for alternative assets such as gold and Bitcoin (already boosted by a pro-cryptocurrency stance in Trump’s policies and currently around $75,000).
The market reactions are following projections largely as the election results followed the poll predictions, and despite a tremendous amount of noise, the “surprise” component is muted this morning. Clearly there is some space between today and the implementation of Trump 2.0, and the detail of implementation may muddy some outcomes – for example, will tariffs immediately translate into inflation or will there be lags, and will tax cuts offset some price rises? The US Fed is set to meet this week, and will they find the data they seek to introduce a further 25 bps rate cut as broadly expected?
Portfolios are likely to be buoyed by today’s developments, and in the medium term we note that equities, real estate and real assets are generally considered to be assets that provide “inflation participation”. The world is changing, and a more protectionist trade stance and geo-political posture will change the landscape for US trading partners and the US dollar. We will digest this nuance and ask it merits a re-underwriting of traditional diversification norms. We will observe the direction of the US dollar to confirm if policies are supportive or not – if not, then diversification by currency will continue to make sense.
We are on the cusp of a new chapter of policy change and market reactions. Watch this space for analysis at each stage.
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