US markets have reacted positively to Donald Trump’s re-election as US President, much as they did in 2016. Once again President-elect Trump ran his campaign on a ticket promoting an ‘America first’ agenda. Back in 2016, expectations around these policies – such as deregulation, a tougher stance on China and corporate tax cuts — led the S&P 500 to post significant gains in the first 100 days after the election. A similar pattern seems to be taking hold this time too.
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Speculation about the prospect of looser financial regulation, a more opinionated stance on interest rate decisions and Mr Trump’s ‘drill, baby, drill’ approach to energy has particularly favoured banking and oil & gas stocks. Conversely, shares in alternative energy companies have been among the main post-election losers.
A more protectionist stance on trade defined Mr Trump’s first term and is likely to feature again in his second. Concerns about Mr Trump’s stance on migration and the prospect of retaliation against his potential future tariffs have preoccupied investors, particularly in the agriculture and food sectors. China imposed a 25% increase in import tariffs on US goods in these sectors, leading to a more than US$27 billion reduction in exports from US firms between summer 2018 and end 2019.
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During his campaign President Trump talked about his preference for a weaker dollar and stronger exports — a wish that however may ultimately prove incompatible with a more hawkish protectionist stance.
Expectations for the future path of US interest rates moved higher the day after the election, in a continuation of a trend that started a few weeks earlier — one which saw the 25bps rate cut delivered by the Fed on 7 November having a very limited impact. We believe that dynamics in short-term rates should be closely watched by investors. Uncertainty about rates is a theme that could dominate markets during Mr Trump’s second term, due to risks stemming from renewed inflationary concerns, looser fiscal policy and a weakening of the regulatory and monetary policy frameworks.
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Mr Trump’s second term also offers much uncertainty in the geopolitical sphere. The Europe Elects poll demonstrated that there was a broad Western European preference for Kamala Harris to win, compared with more clear support for the President-elect in Russia, Serbia, Georgia, Hungary and Bulgaria. Despite President Trump having presided over record sanctions on Russia during his first term, his campaign promise of a swift end to the Russia-Ukraine War and his lukewarm support for NATO may prove renewed sticking points for a multilateral approach to international foreign policy. How far Mr Trump sees advantage in co-operating with US allies is likely to prove particularly relevant to countries and outcomes in Western Europe, the Middle and Far East.
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A more direct approach to countering China’s strategic competition was one of the defining features of Trump’s first term as President. This stance has since gained bipartisan support as competition between the two largest economies has intensified. China is likely to further dominate Trump’s second term both at home and abroad as Beijing has increasingly sought to project a greater influence on global affairs. In light of these strategic considerations and Mr Trump’s re-election, it is notable that China has taken steps to strengthen its sluggish domestic economy, with the National People’s Congress Standing Committee on 8 November announcing a further 6 trillion yuan for local governments in a debt refinancing plan. This measure is in addition to the significant monetary stimulus announced on 24 September 2024 by the People’s Bank of China, which buoyed Chinese equities and raised expectations for this round of fiscal stimulus.
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The election result has unwound some of the prior uncertainty concerning the direction of US policy, boosting markets in the process. Yet significant uncertainty is likely to persist as President Trump starts to enact his policies and priorities. We have flagged three key sources of risks: inflation dynamics, China and geopolitics and the effects of potentially inconsistent economic policies surrounding the dollar and trade strategies — Fathom will be monitoring these closely as the second Trump presidency gets under way.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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