Donald Trump has become only the second president in US history to win two non-consecutive terms after achieving victory over Kamala Harris in yesterday’s US elections, as well as winning the popular vote. In addition to taking the presidency, the Republicans have taken control of the Senate and at the time of writing have a good chance of retaining a majority in the House of Representatives. Furthermore, the Supreme Court has a 6-3 majority of conservative leaning justices as a result of Mr Trump’s first presidency.
Taken together, Mr Trump has a very strong mandate to govern in the US and implement his agenda. He may also test the US’ democratic institutions, seek retribution against political foes and implement wide-reaching measures to deal with illegal immigrants. In respect of foreign affairs, Mr Trump is widely regarded as unpredictable and erratic, so the world is invariably less secure and market volatility is likely to increase reflecting more geopolitical instability.
Immediate market reaction
Today, US investment markets have responded positively to Mr Trump’s victory. The US S&P 500 index of leading US shares has rallied by over 2% and the US domestically focused Russell 2000 index of smaller companies has surged almost 5%. The US dollar index has increased by 1.5% as the US dollar has strengthened against a basket of global currencies. The interest rate on 10-year US Treasury bonds has jumped by 0.15% to 4.44% increasing US government borrowing costs. Cryptocurrency Bitcoin hit a record high as Mr Trump is seen as wishing to promote the US as a global hub for cryptocurrency. Tesla boss, Elon Musk backed Mr Trump’s re-election bid and Tesla shares have rocketed 15% today in anticipation of the prospect of high trade tariffs on Chinese electrical vehicle imports to the US.
Trump’s growth agenda
President elect Trump is anticipated to cut both taxes and red tape favouring a lower tax environment in the US with less regulation. These policies are concerned with promoting US economic growth and are seen as business friendly and a boost for investor sentiment.
Such policies are potentially inflationary which together with concerns in respect of US government debt increasing is reflected in rising yields on US bonds. The result is that inflation expectations are likely to increase, and the Federal Reserve may not be able to cut interest rates as quickly or as much as previously anticipated. If interest rates stay higher for longer this may benefit banks and other US financials.
Mr Trump has previously vowed to ‘drill baby, drill’ for fossil fuels, so as to keep the oil price low and reflecting his views on climate change. In addition to cutting transport and industrial costs for Americans, this could also be used as a political lever in respect of negotiating with other oil producing countries such as Russia and governments in the Middle East. Whilst Mr Trump is unlikely to repeal all the green energy subsidies enacted by Mr Biden since many such measures are supported by Republican states, renewable energy businesses are likely to face headwinds under the new Trump presidency.
Trade tariffs
Mr Trump is expected to use the threat of trade tariffs when negotiating with both rivals, such as China and friendly trading partners, such as the EU and UK. He has suggested a potential tariff of 60% on Chinese goods and 10%-20% tariff on goods from other countries, marking more confrontational relationships with traditional US allies.
Retaliatory tariffs by foreign governments together with a stronger dollar could weaken US exports over time, especially in sectors such as manufacturing.
Impact of Trump on overseas markets
A potential trade war from tariffs is a concern for global economic growth. Tariffs are likely to impact economic growth across the board, but notable losers are likely to be China as well as the EU, particularly Germany and the UK. Europe is likely to be particularly affected since there is significant uncertainty in respect of Mr Trump’s ongoing support for Nato and Ukraine. A lack of US willingness to continue supporting Ukraine would likely embolden Russia and dent fragile European consumer confidence, as well as requiring a large increase in military spending by European governments. From an economic perspective, the European Central Bank will have a challenging job of maintaining stability and avoiding a potential recession with lower interest rates.
In the case of the UK, the National Institute of Economic and Social Research (NIESR) has estimated that UK economic growth could halve if the US implemented trade tariffs. The UK could experience weaker activity, rising inflation and higher interest rates. This heightens the risks in the UK after last week’s Budget of higher taxes, spending and borrowing which gives the UK government less room for manoeuvre in the event of external pressures.
Our position
We have favoured the US markets for several years and this has been beneficial since the US is home to many of the world’s best companies and US economic policy has been supportive of business growth. The election of Donald Trump as the 47th President reinforces our preference for the US, subject to reviewing his policy announcements in anticipation of his second presidency from 20 January 2025. The combination of lower taxes and de-regulation should help maintain the risk appetite buoyant for US equities.
In addition, US investments are likely to offer strong defensive characteristics from the inevitable volatility given that the world is increasingly uncertain with the US expected to become more isolationist in respect of foreign policy. Of course, valuations remains important when selecting investments and a broad exposure to the US market is likely to be rewarded with attractive returns from mid-cap and smaller cap US companies across a wide range of business sectors, not just the ‘magnificent seven’ technology companies which have driven markets higher in recent years.
Whilst global diversification is important, care will be required to avoid countries and business sectors which may be impacted by Trump’s protectionist policies. In particular, Chinese and European economic growth is likely to be hit by US tariffs; companies operating in sectors such as electric vehicles, wind turbines and other sectors dependent on global supply chains are likely to experience headwinds from the new US administration.
Overall, looking ahead and taking into account the US election results, we anticipate there are plenty of good investment opportunities for markets globally to continue delivering attractive returns.
If you have any questions or concerns in respect of the US elections, please do not hesitate to contact the office for advice or further information.
Please note that our view of the US elections is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.