
Trump, The Fed and The Markets
The November 5th election saw Trump return to the presidency, with his victory reflecting the strong support he maintained in polling throughout much of the campaign season. While markets had been partially pricing in a Trump win given his polling lead over Biden earlier in 2024, the decisiveness of the victory provided additional clarity for investors.
The financial markets’ initial response has been notable, with movements in equities, bond yields, and the dollar reflecting expectations of Trump’s promised tax cuts. While Biden’s administration had focused on infrastructure spending and climate initiatives, Trump’s platform centered on business-friendly policies and deregulation, which the market typically views favorably.
The Democrats’ inability to convince voters of their economic stewardship proved crucial to the outcome. Despite recent positive economic indicators, persistent inflation concerns remained at the forefront of voters’ minds, creating a disconnect between national statistics data and household experiences. This gap ultimately worked in Trump’s favor at the polls.
The US economy Trump inherits shows considerable strength. Third quarter GDP growth of 2.8% quarter-on-quarter annualised demonstrates America’s continued outperformance versus other developed economies, particularly compared to the UK and Europe. The recent earnings season has shown particular strength in the banking sector, though technology companies, especially those dependent on semiconductor demand, have shown more mixed results. The broader market view suggests that while big tech’s growth may be moderating, other sectors offer significant growth potential, supporting the prevailing belief that a recession will be avoided.
Trump’s return to office positions him to capitalize on this economic momentum. However, his stated intentions regarding China and trade policy present both opportunities and challenges. The potential for renewed trade tensions with China could drive inflation through tariffs, though Trump’s team argues this could be offset through tax reductions and increased domestic manufacturing. This dynamic particularly concerns international markets, as both European and UK exchanges remain sensitive to US-China relations given their global economic impact.
The Federal Reserve’s 0.25% rate cut on November 7th aligned with market expectations and would likely have occurred regardless of the election outcome. The Fed continues to prioritize labor market health over inflation concerns, though they will closely monitor any inflationary effects from potential new tariffs.
While Trump’s unpredictability once unnerved markets during his first term, investors now have historical context for his presidency. Unlike 2016, when his first victory triggered initial market uncertainty, his return has been met with more immediate positive sentiment. Markets have already demonstrated an uptick, suggesting investors feel more confident about navigating a Trump presidency based on past experience.
Certain sectors stand to benefit from Trump’s stated policies. Defense stocks, which saw gains during his previous term due to increased military spending, have already shown positive movement. Energy stocks are anticipating reduced regulatory oversight, while financial sector stocks are responding to the prospect of corporate tax cuts. Technology companies, despite recent mixed earnings, may find support in business-friendly tax policies.
As markets digest the election outcome, the reduced uncertainty should contribute to stability. While markets maintain their non-partisan nature, they historically respond well to political clarity, regardless of the winner. With the election concluded, attention will now shift to policy implementation and its economic implications.