The U.S. election was held on Tuesday, November 6 and Donald Trump won the race for the presidency, defeating Vice President Kamala Harris to earn a second term in the White House. The Republican party also won the Senate and the U.S. House of Representatives. 

Equity markets reacted favourably to the news, with the Dow Jones Industrial Average and S&P 500 advancing approximately 2-3% in the Wednesday trading session. 

We’ve assembled a collection of comments and analysis regarding the outcome, specific to businesses, the economy and stock markets.   

If you would like the cliff notes, the commentary below can be summarized in the following points: 

-Do not make emotionally charged investment decisions in the immediate aftermath of the election
-The U.S. had a Republican sweep in the first two years of Trump’s first term
-Trump will likely not proceed with everything he said during this campaign trail
-Trump is answerable to the business community
-The key Trump campaign promises of lower corporate tax rates, cuts to regulation, and infrastructure spending are generally supportive for the economy and financial markets
-The economy is not in the same place as it was in 2016, and we should not simply expect a repeat of 2016-2020.

 

Noah Blackstein, Portfolio Manager, Dynamic Funds 

“In 2016 I wrote the following:  

“The next President of the United States is Donald Trump and Congress has also gone to the Republican Party. It is important for investors to take a deep breath to separate personal feelings towards the individual and policies that will likely be enacted. With a clear mandate it’s fairly obvious what’s on the legislative agenda – corporate tax cuts, regulation cuts… and infrastructure spending. While questions may surround global trade, from a domestic U.S. perspective it’s tough to see the economic negatives in any of these policies.” 

I feel the same way in 2024. The 4 years between 2017 and 2020 were very good years for our funds under that macro economic backdrop, and we suspect that this period will be equally benign from a macro perspective.”

Eric Lascelles, RBC Chief Economist 

For our part, I’ll say that we’re not assuming, that Trump does everything that he’s talked about on the campaign trail. Just to give you a sense, we’re not anticipating large scale deportations in the US. We’re not anticipating the full set of of threatened Trump tariffs to be implemented. We’re not convinced as an example that there will be a blanket 10% tariff on the world. 

We’re not convinced that the Federal Reserve or the civil service will be sharply undermined, though I’m sure there will be efforts to make changes there. And, let’s keep in mind, just in terms of what might, to prevent some of the more exotic proposals from being enacted, do keep in mind Congress, does not want many of those things. 

Trump’s many business supporters don’t want those sorts of things. Trump is famously sensitive to the stock market, into the economy and the economy and stock market probably wouldn’t want those things either. So we’re not looking for the more extreme proposals to be implemented.

Matt Miller, Political Economist and Reagan Anderson, VP of Government and Regulatory Affairs, Capital Group 

U.S. politics:  

• Trump has won decisively, and the U.S. has avoided a political legitimacy crisis. Trump gained not only the support of working-class white men, but also many Black and Latino voters, underscoring the importance of inflation, immigration and national security as key issues that swayed voters.  

• Republicans have regained the Senate, which means the new administration will have momentum to push through its policy initiatives. Trump and a Republican-controlled Senate will have the power to quickly confirm heads of key federal agencies. The organization of Trump’s team has advanced substantially since he first took office in 2017.  

• Regulatory agencies will be directed to roll back Biden-era rules and implement a more business-friendly approach.  

• Trump will also work with Congress on issues related to housing, domestic energy production and the promotion of digital assets.  

• Sustainable finance, climate change initiatives and alternative energy projects will come under renewed scrutiny as will existing investments in certain regions, sectors and companies.  

U.S. economy:  

• Trump is inheriting a U.S. economy that remains in decent shape, owing to a generally strong consumer, albeit with lower end weakness, and a mostly stable labour market. We expect the President-elect to implement a fiscal package, fueling a pro-growth outlook. Based on such previously proposed initiatives, the U.S. economy could see higher growth, inflation and interest rates. The combination of pro-growth de-regulation and public spending will likely offset the drag of higher tariffs and geopolitical uncertainty.  

Under a more optimistic scenario, here are some estimates from economist Jared Franz:   

• Real GDP in 2025 could reach 3% to 3.5%  

• Inflation may be slightly higher — around 2.5% to 3% in 2025   

• The federal funds target rate could rise to 4% in 2026, up from 3%   

• Trump has signaled tariffs are a policy priority, recently suggesting 10% tariffs on all imports, with up to 60% on Chinese-imported goods   

• Higher bond yields could accompany wider deficits   

• Initiatives introduced by the Biden Administration, such as the Inflation Reduction Act of 2022, are unlikely to be repealed, though we may see some provisions clawed back.   

U.S markets:  

• The S&P 500 Index climbed to a record high after election results became more certain. The run-up in U.S. equities appears in part to be a relief rally, given a decisive election has lowered the level of political risk. As the market remains focused on potential tax cuts (both corporate and personal) and deregulation, we could see equities rally further.  

• U.S. interest rates have quickly priced in the potential for reflation. The 10-year Treasury yield could continue to climb to the 4.5%- to 5%-range, according to Franz’s estimates.  

• Meanwhile, the U.S. dollar is likely to maintain its strength against major currencies, given the resilience of the U.S. economy. The shift in relative interest rate expectations in favour of the U.S. will be an important driver, as will the magnitude of the tariff regime.  

Within equities, a few themes could emerge with a Republican sweep:   

• For banks and financials, weaker regulation and lower capital requirements should help earnings growth of these companies.  

• Aerospace/defence should benefit from potential increases in spending driven by sustained geopolitical tensions.   

• Health care companies could be helped by proposed deregulation that promotes competition and efficiency. However, lower prices could affect profits and is one of the reasons that large cap pharmaceutical stocks have declined post the election outcome.  

• In oil and gas, U.S. drilling and mining will be encouraged and deregulated but could result in a lower price per barrel.  

• Industrials may benefit from companies moving manufacturing back to American soil. Assuming tariffs are not onerous, various Japanese and European industrial firms that supply specialized chemicals and niche automation components are well positioned, based on this pro-cyclical stance.   

• Small-cap companies can be beneficiaries of a strong U.S. economy, the reshoring of supply chains and a potential cut in the corporate tax rate.  

• Multinational companies, especially those that trade with China, could face headwinds from tariffs.  

 
Tariffs & taxes:   

• The administration plans to adopt a more assertive stance on trade, including aggressive tariffs, export controls and investment restrictions on China.  

• Action on tariffs may move forward once the new administration confirms its commerce and treasury secretaries, as well as the U.S. trade representative.  

• Congress will also likely move fast to produce a budget that extends the 2017 tax-cut bill. President-elect Trump has also proposed a 15% corporate tax rate, down from 21%.  

• One key question may be the extent to which policymakers consider balancing tax cuts and tax extension’s benefits with how that may impact the fiscal deficit, and ultimately U.S. public debt.  

National Bank CIO Office 

Specifically, the Republican candidate campaigned with the intention of cutting the corporate tax rate again, this time from 21% to 15% for companies manufacturing in the USA, and to 20% for others. While this policy is likely to boost the profits of S&P 500 companies by around 4%, it should be noted that this is a tax cut around half the size of that delivered during the previous Republican term 

When it comes to trade policy, Donald Trump’s threats are certainly bolder than in 2018. To put things in perspective, a universal 10% tariff and a 60% tariff on China could technically push the effective U.S. tariff rate close to its 1930s peak: a scenario that would significantly reduce economic growth and increase inflation. Moreover, even a more modest outcome involving “only” a 20% tariff on China would be around 1.6x larger than what was delivered in the previous trade war. 

At first glance, all of this is cause for concern. But let’s not lose sight of the fact that the threat is first and foremost a negotiating tactic favoured by the author of The Art of the Deal. Ultimately, the aim is to reach agreements with trading partners, not to sabotage global economic growth. And in principle, the rest of the world is better prepared for the armwrestling that awaits this time around. One thing is certain: Donald Trump will face a much tighter fiscal environment than he did eight years ago. Back then, the interest cost of U.S. government debt was near an all-time low. Today, it is approaching the highs of the early 1990s, with a budget deficit unmatched outside of a recession. 

The new US administration will do well to take this into account before adopting new policies perceived as too costly and, above all, inflationary. Otherwise, markets may end up imposing some fiscal discipline, which is what today’s rise in bond yields signals. 

David Rosenberg – Rosenberg Research 

It may be just a bit too simplistic to assume that we are going to be in for a repeat of the 2016-2018 period, but that surely is the early expectation by the investment community. So far, just a day after the election, the old playbook is playing out to a tee. But will it last? The runway for markets seemed a lot more enticing back then. 

First, equity market positioning, sentiment and valuations at the time were light years away from where they are currently. Investors were depressed, coming off Brexit and believing Hillary Clinton was going to win. Market Vane’s bullish sentiment was 60 then, and is at a nosebleed 70 currently. Today, investors had largely priced in a Trump victory early on and markets are frothy to say the least. 

The forward P/E multiple was 17 times in November, 2016, versus 22 times currently. Every valuation metric from price-to-earnings, price-to-sales, price-to-book, the Buffett Indicator (market cap-to-GDP) and the CAPE multiple are completely off the charts today – which was not the case the first time Donald Trump won. And that’s not even taking into account an S&P 500 dividend yield over 2 per cent then and barely over 1 per cent today. 

High-yield bond spreads were 500 basis points then and are 280 basis points now. Investment grade spreads were 140 basis points versus 85 basis points today. Like equities, a whole lot of good news and then some is embedded in the credit markets at current levels. Not the case back in 2016. 

For bonds, the starting point for the 10-year T-note yield in November, 2016, was 1.8 per cent. One could have easily argued for a cyclical bear market in Treasuries at that yield level – but today’s 4.5 per cent yield offers coupon protection that did not exist eight years ago. 

The stock market already had a tailwind in November, 2016, with or without the GOP sweep, as there was no competition from a 0-per-cent real risk-free rate (using the yield of the 10-year Treasury minus the impact of inflation). Today, that inflation-adjusted rate is north of 2 per cent. Big difference. 

The Fed Funds rate was near the zero mark at 0.5 per cent back then – and it had only one way to go (to 2.5 per cent at the December, 2018, peak). At 5 per cent today, and coming off the cycle peak, there’s only one way to go on this score – lower. The only question is the magnitude. 

With respect to the economy, 2016 was more mid-cycle in nature with an unemployment rate near 5 per cent versus the current late-cycle 4 per cent jobless rate. That is a huge difference. What it means for Donald Trump’s policy plank is that there are more acute capacity constraints today compared with the 2016 election win. 

The deficit-to-GDP ratio of 3 per cent and federal debt-to-GDP ratio of 95 per cent were far less of a fiscal constraint on Mr. Trump’s fiscal ambitions then compared with today, where the deficit tops 6 per cent of GDP and the debt ratio is fast approaching 130 per cent. This is a fiscal straitjacket that the market bulls, yet again salivating over prospective tax relief, may not be factoring in. 

 

Rob Carrick, Personal Finance Columnist, Globe & Mail 

Whatever happens in the U.S. election Tuesday, do not make any important financial decisions in the immediate aftermath. Tense times distort our sense of reality in a financial sense. We look for ways to mitigate uncertainty and to protect our assets. 

What is the smart money doing? The smart money does nothing because it anticipates disruption in advance and plans accordingly. 

 

 

Sources: Dynamic Funds, Capital Group, National Bank, Rosenberg Research, Globe & Mail