The Republicans had a decisive win in the white house as former President Trump (now President Elect Trump) won both the electoral college and the popular vote. The market reacted very positively on the news given his largely pro-business views and policies, advancing approximately 3.7% on the S&P 500 in the four days following the election. When it comes to the bond market, interest rates continued their upward advance, pushing to their highest levels in the past five months. Although the President Elect’s proposed policies likely fueled a further advance in the 10-year treasury rate, it has been on a pronounced upward move since the Fed’s initial interest rate cut back in September. Now, you may be logically asking why the ten-year rate would rise if they are cutting the fed funds rate? In financial market you will sometimes get what people call buy the rumor sell the news, meaning markets begin pricing in the impact prior to an event, and then unravel the overreaction afterwards. I do believe that is what kicked off the initial move, but beyond that which has been much more meaningful, is the way the economic data has been coming in. Since the growth scare throughout the summer, the data has been very solid overall. We received a very strong jobs print on October 4th which showed robust job growth for the month of September as well as positive revisions in the prior months. Retail sales and the service sector of the economy have also shown overall strength. At the same time inflation has edged marginally higher, causing some to question whether the dis-inflation trend is still intact. All of this has put upward pressure on longer-term interest rates which was further fueled by the election results.
So, what does a second President Trump term mean for the markets and the economy? Some of his main talking points throughout this campaign revolved around tariffs, taxes, de-regulation, and immigration. Before I discuss some of the potential implications, I do want to note that we typically don’t get the full extent of policies discussed on the campaign trail, especially with such a narrow margin in the House. When it comes to tariffs, President Trump has been discussing a ten percent increase across the board and sixty percent on China. That would have large economic ramifications if it came to fruition as is, but I would imagine it will ultimately be more country and industry specific. Tariffs do have the potential to add inflationary pressure, but it depends on who ultimately bares the costs. If the bulk of it gets passed to the consumer then it could, however as we saw in 2017-2018 it’s not always the case. CPI remained pretty steady throughout that time period; however, the manufacturing sector did feel the pain as seen in the ISM manufacturing numbers. If Tariffs do add upward pressure on inflation, it will be seen as more of a one-off event, not having the same impact in the following years. The 2017 tax cuts will likely be extended with the potential for further tax cuts for individuals and corporations. These could lead to above trend growth, however, would further increase the deficit, both of which should keep longer rates higher. Immigration reform will likely lead to a decline in the participation rate, which could ultimately reduce the non-farm payroll numbers. Lower participation could also put upward pressure in wages, however, could be offset by higher productivity.
With the election overhang out of the way, the equity market seems worry free at the moment. We are in a seasonally strong period of the year, and the first year of a presidential cycle is also favorable. With that said, pullbacks and corrections are common, and markets can be more vulnerable at elevated multiples, as we are now. But for the time being the economy and earnings are on solid footing, and the Fed is in the midst of a cutting cycle, which is historically good for stocks.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Economic forecasts set forth may not develop as predicted.