What the Trump/Republican Victory Mean for Markets
What Happened?Markets are up strongly today. Donald Trump became the only the second President to win two non-consecutive terms (the other was Grover Cleveland) after he soundly defeated Kamala Harris. Republicans also flipped the Senate while the House of Representatives remains officially undecided.
However, with Trump’s sizeable margin of victory and broad Republican outperformance in the Senate, it’s likely the Republicans will win the House as well, ultimately creating a Republican sweep and meeting a “Good” scenario analysis. This is what the market is pricing in this morning.
Is this a bullish game-changer? Not really, but that’s mainly because markets are up so much already YTD and at stretched valuations. That said, the election results should spur a rally into year-end, barring any other major surprises. Markets will price in a future pro-growth policy agenda and also price in a likely full extension (and possible increase) of the Tax Cuts and Jobs Act (TJCA).
In 2016, the Republican sweep led to a 4.5% rally into year-end and given the currently positive macroeconomic backdrop of solid growth, falling inflation and looming Fed rate cuts a rally to, and through, 6,000 in the S&P 500 before year-end is entirely possible (and shouldn’t be a surprise).
What should outperform and underperform?The Republican agenda is characterized by: Pro-growth policies (tax cuts), deregulation, focus on domestic industries and negotiating better trade relationships. The likely market winners from this policy stance are: Value (VTV), small caps (IWM), cyclical sectors and domestically focused sectors such as Industrials (XLI), Defense (ITA), Transports (IYT) and Banks/Financials. The relative “losers” (which should underperform, but still rally) from this policy stance are global traders, China/Emerging Markets, defensive sectors, and large importers.
Essentially, this should continue the broadening of the rally we’ve all witnessed since July where the “rest of the market” catches up with (and outperforms) mega-cap tech and growth factors.
What are the risks we need to watch going forward?Risk 1: Treasury yields. Correct or not (we’ll all find out together), the market views Republican control of Washington as negative for the debt and deficits. As a result, Treasury yields will rise on this news (the 10 year Treasury yield is up 17 bps this morning) and continue to be elevated until such time as Republicans calm fears of rising debt and deficits. Risk 2: Trade wars. It is not correct that Trump has unchecked powers to levy tariffs (I’ll be covering this more in the coming days/weeks). What is correct is that once his administration meets a burden of proof to “green light” tariffs against a country, then he has broad and unchecked powers. So, with China, he does have broad powers. With other countries, especially trade partners with whom we have a legal treaty (Mexico and others) he does not have broad powers.
Nonetheless, clearly there will be increased trade volatility and looking past the fiction for fact will be difficult and as a result, it’s reasonable to expect trade-related volatility going forward. Bullish/Bearish: Stocks: Bullish. Treasuries: Bearish. Gold: Neutral. Dollar: Bullish.
What’s Next:The results for the House of Representatives are the next major data points as they are needed to complete the Republican sweep (again that’s likely given Republican performance but not guaranteed). Additionally, while it’s flipped, the size of the Republican Senate majority is still unclear (it could be as large as 55/45) which would be perceived as positive for Republican legislative changes (less chance one or two senators kill a bill).
Beyond the final election results, the next major events will be cabinet appointments and, at that time, we’ll all get a better picture of the actual policies the new administration and government want to pursue (and we’ll have a better idea how that will impact markets).
Bottom line:This likely “green lights” a solid year-end rally as long as growth and the Fed perform as expected. The market will likely view this outcome favorably into year-end and as such, focus will turn back towards the Fed (continued rate cuts?) and growth (still stable). As in 2016, markets will likely look past some of Trump’s commentary and as such, don’t expect trade volatility or fiscal concerns to impact markets until 2025, but it is reasonable we all brace for a more volatile market in 2025 then we’ve had in 2024. This is good news for investors for now, but we will watch to see if anything changes as we move forward.
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