Trumpenomics

To some a bond villian, to others the main character, Donald Trump has once again Top Trumped. A resounding victory led the S&P 500 Index and technology-heavy Nasdaq Index to new highs. After he won the US election, with the Republican Party gaining control of the House of Representatives and the Senate, even the smaller companies focused Russell 2000 Index bounced significantly.

Lower taxes, higher government spending and deregulation have been the focus, with expectations that these could drive higher earnings and economic growth, while also risking inflationary pressures. Government bond yields rallied and prices fell initially on the back of worries about the government deficit. Of course a lot of this is speculation and its very early days as to what the new Republican party will implement. One thing we know is this party’s control of both the upper and lower house give it significantly more power than it had in 2016.

Elsewhere, US equity markets pulled other markets higher with the news seen as good for the global economy. Trade tariffs will no doubt be on the agenda for many Governments in the coming weeks, specifically in Europe and China. Interestingly, when we’ve met a number of our Asian equity managers in recent weeks, comments on tariffs have been around higher margin ability. It reminds us of tobacco companies. When a government increases tax on cigarettes, the company adds a few pence on for themselves and blames the government. In the process this could be improving outcomes – it is inflationary, though!

While bond markets reflected the initial inflation and growth story, it was the Bank of England and Federal Reserve’s turn to move the dial. Both central banks lowered interest rates by 0.25% on Thursday; relief for bond markets and equities – they like expectations to be met. Fed chair Jerome Powell spoke of elevated inflation in the short term but a path to normality. He would not be drawn into debating Trumpenomics and its effects for now.

While the interest rate cut was positive, the Bank of England increased inflation expectations for 2025 from 1.7% to 2.5%. Rate cut expectations for next year have been tapered back in the UK and US, as inflation pressures and tighter than expected labour markets persist.

Elsewhere, the shine remains on gold, as it hit new highs ahead of the election result. It subsequently pulled back, but this reflects the nervousness around politics on the global stage. Gold is of course seen as a safe haven as well as an inflation hedge. The other asset that benefited was oil, as it reached recent highs of $76 a barrel.

When markets move and begin to re-price economic outcomes, it provides an opportunity to review our positions. This week we held our investment committtee on the day of the election result. Although markets have bounced, volatility tends to provide opportunity and we will update you soon when we’ve implemented our changes.

Looking ahead

The final stage of the earnings season will be apon us with the likes of Alibaba, Tencent and Disney. Company results were positive for these last quarter, eyes will focus on the outlook.

The US will provide consumer price inflation for October, expectations are for a rise to 2.6% year on year. Finally following the national people’s congress we will get Retail sales, industrial production and and fixed asset invesment.