The Election Is Over. Now What?
Market Reactions and Economic Implications
Neil Goodson, CFA
November 11, 2024
Quick Take
The recent presidential election has led to significant movements in financial markets, with the stock market surging, bond yields showing volatility, and the US dollar strengthening.
This initial positive response from investors reflects optimism over potential tax cuts and economic growth under President Trump's administration, though uncertainty lingers around trade and immigration policies that could pose risks.
To navigate these changes, maintaining a diversified, long-term investment strategy and staying adaptable is recommended.
The recent presidential election has once again put the financial markets into a whirlwind, influencing everything from stock prices to bond yields and currency valuations. As investors and analysts try to gauge the full implications of President Trump's upcoming term, the initial market reactions give us a glimpse of what the economy might look like under this administration's policies.
Stock Market Surge
In the four days following the election, the S&P 500 soared by 3.8%, hitting new highs driven by strong gains in specific sectors. Consumer discretionary stocks led the charge, with Tesla alone rocketing up 39%. The rally was not limited to tech; energy, industrials, and financials also posted impressive gains. This surge in the stock market indicates optimism about potential economic growth under the Trump administration. Historically, market participants tend to react positively to anticipated fiscal stimulus, deregulation, and the possibility of tax cuts or the extension of the current tax regime has fueled this bullish sentiment.
Volatility in the Bond Market
On the bond side, yields initially jumped higher after the election, reflecting increased expectations for growth and inflation but then reversed much of that move. The 10-year Treasury yield has climbed to 4.3%, with shorter-term yields experiencing even sharper rises—the 2-year Treasury yield stands at 4.25%. The bond market appears to be undecided whether higher growth and larger fiscal deficits will result in higher yields or if the new administration threatens the Federal Reserve’s independence.
Inflation expectations embedded in the bond market are also noteworthy. The 5-year inflation rate implied by the TIPS market has reached 2.42%, up nearly 0.4% since the end of August. This spike reflects a growing belief that inflation could pick up, possibly driven by expansive fiscal policies and trade measures that could push prices higher.
A Stronger Dollar
The US dollar has strengthened against a broad basket of major currencies since October. Since September 30, the dollar has gained 6.3% against the Japanese Yen and 3.9% against the Euro. This appreciation in the dollar signals confidence in the US economy's relative strength and is tied to expectations of tighter monetary policy and robust economic performance under the new administration.
Anticipating Trump’s Policy Moves
While the stock, bond, and currency markets have shown clear initial reactions, uncertainty remains regarding the specifics of President Trump's policy objectives. Markets are forward-looking by nature, and the current momentum reflects the hope for tax policies that could boost economic growth. However, these expectations come with caveats.
Tax Policy and Economic Growth: With Republicans gains in Congress, it’s likely existing tax cuts will remain, and the introduction of new ones are possible. Historically, tax cuts have been associated with short-term economic stimulation but have also led to larger deficits. The big question remains whether the administration will balance tax reductions with significant spending cuts or rely on economic growth to offset the deficit. If tax cuts do boost economic activity as anticipated, they could extend the current economic expansion.
Tariffs and Trade Tensions: A major policy area that introduces potential volatility is trade. Trump has previously campaigned on the imposition of steep tariffs, suggesting rates as high as 60% on China and 10-20% on other trading partners. Such moves would mark a significant escalation in protectionist trade policies, potentially straining relations with key partners and increasing costs for consumers and businesses. While tariffs could aim to protect domestic industries, they could also trigger retaliatory measures, disrupt global supply chains, and slow down economic growth.
Immigration and Labor Market Impacts: Trump's proposed mass deportations could create immediate disruptions in sectors that rely heavily on immigrant labor, such as agriculture, construction, and low-wage services. Removing large numbers of workers from the labor market could drive up wages in the short term but also lead to labor shortages and reduced productivity in some industries. The long-term economic effects of such a policy remain unpredictable, especially if the labor supply cannot be replaced quickly.
Inflation and Economic Risks
All these factors contribute to inflationary risks. The combination of tax cuts, tariffs, and potential disruptions in labor markets could lead to higher prices across various sectors. The bond market's rising inflation expectations reflect this concern. Should inflation accelerate beyond the Fed's comfort zone, it could prompt a more aggressive tightening of monetary policy, leading to higher interest rates and potentially slowing growth.
What It All Means
At this stage, we are only seeing the initial outlines of what could become changes in US economic policy. The positive momentum in the economy, bolstered by robust market reactions, suggests that investors are hopeful for continued growth. However, the true impact of trade and immigration policies remains to be seen.
It's natural to feel uncertain about what lies ahead. The markets, by their nature, react to perceived risks and opportunities, and the current landscape is a mix of both. For individual investors, a steady-as-you-go strategy makes the most sense. Maintain a diversified portfolio and avoid making knee-jerk reactions to short-term news. We caution against making large bets on which sectors will be winners and losers (recent history suggests that can be difficult to get right).
Inflation-protected bonds are a staple of our taxable fixed income strategy. As the name suggests, they perform well when inflation expectations rise. With benign expectations right now, we think this will be an important component of a diversified taxable bond strategy.
Ultimately, while it’s impossible to predict every twist and turn, maintaining a long-term investment strategy that aligns with your goals and risk tolerance is key. Staying informed and being prepared to adapt will be crucial as we move into this new phase of economic policy.
Contact us at 865-584-1850 or info@proffittgoodson.com
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy, or investment product, and should not be construed as investment, legal, or tax advice. Proffitt & Goodson, Inc. makes no warranties with regard to the information or results obtained by third parties and its use and disclaims any liability arising out of, or reliance on the information. The information is subject to change and, although based on information that Proffitt & Goodson, Inc. considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers (Interactive Data Corporation, Morningstar, etc.). The Market Categories illustrated in this Financial Market Summary are indexes of specific equity, fixed income, or other categories. An index reflects the underlying securities in a particular selection of securities picked due to a particular type of investment. These indexes account for the reinvestment of dividends and other income but do not account for any transaction, custody, tax, or management fees encountered in real life. To that extent, these index numbers are artificial and cannot be duplicated in real life due to the necessity of paying those transaction, custody, tax, and management fees. Industry and specific sector returns (technology, utilities, etc.) do not account for the reinvestment of dividends or other income. Future events will cause these historical rates of return to be different in the future with the potential for loss as well as profit. Specific indexes may change their definition of particular security types included over time. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of Proffitt & Goodson, Inc. Past performance does not guarantee future results.
