The United States is set for a Republican President and the second Trump Presidency. The election result was less close than most polls anticipated and, at the time of writing, a Republican majority in the Senate looks assured and the House could turn red too. There will be plenty of time to digest the impact, but some initial thoughts:
Equity Markets
Equity markets don’t like volatility or uncertainty and that now looks more likely under a second Trump Presidency, rather than what would have been perceived as a ‘safe-pair-of-hands’ Harris Presidency. This implies more unsettled market conditions, but in mitigation, the likelihood of more tax cuts, particularly if corporate tax cuts now get implemented will be a strong support for US company earnings and a support for US equities. Initial reactions have been positive from equity markets and the US futures markets point to initial boost provided to more domestically focused smaller companies.
History would suggest the election outcome makes remarkably little difference over the long-term to equity markets, which are far more influenced by the broader outlook of the economy and the strength of corporate earnings and profits. However there should be some wariness of a repeat of the first Trump Presidency, which saw erratic policymaking and hard-line trade policies upset markets on occasion. Expect the same again.
Trade
Raising tariffs on, well, just about everyone and everything, is a key focus for Trump, touting a 60% tariff on Chinese goods and 10% on goods from the rest of the world.
The American consumer is going to see higher prices if tariffs get implemented. Whilst some of the cost of this could be absorbed by companies keen to retain their US market share at the expense of profit, and some could be absorbed by a stronger US dollar, rising US consumer prices would most likely curtail the amount of interest rate cuts and underpin dollar strength. This for the near term anyway given the initial impact of rising prices, but over the longer term could give way to slowing trade and global growth. A one-sided world with US tariffs on the rise, will also weaken the outlook for economic growth in Europe, as well as Asia. Tariffs are a two-way game though, so the risk of rising trade tensions, dare we say trade wars, are looking more likely. Tariffs are a challenge for Europe in particular, which looks like the obvious market for excess Chinese supply.
The Energy Transition
During the Biden Presidency, there has been a significant amount of fiscal stimulus in the United States directed towards increasing the renewable energy supply through packages such as Inflation Reduction Act (IRA). The IRA directed $200bn towards the transition and this level of fiscal stimulus is unlikely to be repealed. It was both a key Democrat policy, but also a significant number of Republican-leaning politicians and their States have benefitted from IRA investment for renewable energy projects.
It now looks like the support for more fossil fuel extraction and energy production has the go-ahead and the transition to clean energy looks weakened. There may be no disincentives for the energy transition applied, but the obvious support it has had under President Biden will dissipate away.
Geopolitics
Whilst tariffs would weaken global trade, they also threaten increased geopolitical risk. The US/China trade war was a feature of the first Trump Presidency. Now, with war in Ukraine and hostilities in the Middle East, a Trump Presidency is likely to seek an ending to conflict, without a consideration of the broader price.
America’s allies are increasingly looking at the fabric of their security blanket and wondering whether the stitches remain in place, so Trump repeating his argument that should other countries want to enjoy the security of American military power, then they need to pay for it, serves only to undermine the solidity of existing security structures, such as NATO. The mitigation here is that Trump’s threats last time he held power, did prompt increasing amounts of defence spending by many members of the alliance. Expect more defence spending in Europe and in Japan and South Korea.
Inflation
A second Trump Presidency is likely to see the full renewal of existing tax cuts that were due to expire in 2025. Trump would likely favour retaining the existing style of cuts that he implemented before, helping higher earners and reducing corporate taxes.
The 2024 version of Trump, with a combination of tariffs, restricting migration and its cheap labour supply plus tax cut renewals, looks a candidate of higher than currently forecast inflation. That goes hand in hand with the likelihood of the Federal Reserve needing to preserve interest rates at a higher level under a Trump Presidency than what would have been President Harris, which in turn is likely to turn Trump’s ire towards the Federal Reserve.
Threat to an independent Federal Reserve
Independent central banks have been one of the key contributors to maintaining the credibility of anchoring long-term inflation expectations to their set targets, even during the inflation spike of recent years. If a future threat to the independence of the Federal Reserve gains more credence, then that confidence will be thrown into doubt. Whilst you can agree or disagree with the timing and direction of interest rate policy, and we often have, maintaining the credibility of a central bank through its independence is sound policy. Trump looks likely to place himself at odds to the Federal Reserve and wants more influence over interest rates. In 2026, a new Fed Chair needs to be appointed by the President, under Senate approval, which represents an opportunity to threaten normal Fed business. For now, expect a rate cut from the Fed this Thursday, and most likely again in December, before a pause and reflect moment on the likelihood of being able to push through the anticipated 100bps of cuts next year.
Bond Yields
And this all bubbles down to fixed income. In advance of this election, bond yields moved higher quite strongly, but in the immediate moments after the result, look more muted than in 2016. There may now be less scope for interest rate cuts under President Trump, if inflation settled at a higher rate due to tariffs, but a more favourable corporate tax environment would help preserve company balance sheets too.
