Trump was branded a surprise victory by the media ‘establishment’, but I have a feeling a vast number of the Americans are muttering ‘I told you so’. The feeling of discontent around the US and EU is raw and has been growing since 2008. Governments, the media, and corporations have become more bureaucratic, elite, and separated from the 99%.
However this post isn’t here to discuss the issue of anti-establishment politics. What I want to look at is where the markets go from here. The presidential election was binary and ended up producing a republican House, Senate and President. As a result things are going to change in D.C. and this is going to affect the economy and potential investments.
The markets attempted to stomach the unexpected victory, by buying gold (+4%) and selling stock market futures (-5%). This was the exact trade everyone expected from a surprise Trump win, and it started paying off. A movement to safe haven, a sell off of US equity. However when the U.S. markets actually woke up some 6 hours later the story was different.
Trump’s victory speech was seemingly un-scripted, but gave two signals to the markets: unity and infrastructure spending. A mellowed Trump with at least one clear goal in mind was exactly what the markets needed to hear. The following movements happened:
- U.S. stocks rallied over +1%, and since Election Day the S&P500 is up +2%.
- Treasury yields rose, and fast. The 10-year T-Bill yield has risen from 1.88% to 2.29%, and the 30-year is testing 3%, up from 2.6%.
Some stocks have done well, others not so well:
|Pharmaceuticals||+10%||Clinton had an anti-pharmaceutical rhetoric.|
|Guns||-20%||A republican government takes away the threat of gun regulation, therefore reducing short term demand.|
|Prisons||+30%||The democrats were aiming to phase out privately run prisons.|
|Technology||-5%||Trumps anti-globalisation stance will harm the revenues of global american tech companies.|
A key movement here has been the rise in Treasury Yields. This tells us that government debt is being sold off – lower prices mean higher yields. The reason investors are moving out of US debt is because of Trump’s pledge to increase infrastructure spending. This type of expenditure is likely to increase the supply of government debt, whilst also stoking inflation. With higher inflation expectations we can now begin to expect the Fed to raise interest rates. In fact the probability of a Fed rate hike in December is now over 80%.
Higher infrastructure spending, inflation and rising rates increases the appeal of the U.S. cyclical sector. Investors have begun selling off their bond proxy stocks, such as healthcare, utilities, and consumer staples, which are traditionally held as a way of achieving yield when bond yields are low, and are focusing in on cyclicals; high value financials, technology and industrials.
However this cyclical movement isn’t solely a Trump phenomenon. The U.S. economy for the past year has looked increasingly strong. Q3 GDP came out at +2.9%, the economy has added 150K+ jobs each month on average for the past year, wage growth is +3.8% and some measures of core PCE are recording levels close to +1.7% – only 0.3% under the Fed’s target rate of 2%. With the added enthusiasm of a Trump victory inducing a pro-business environment, the turning on of the oil taps, greater fiscal spending, and a one-off reduction in corporate tax encouraging repatriation, things are looking rosier for the U.S.
However before you go out and buy up U.S. banking stock and every road-building company you can think of, it’s worth taking a step back. Whilst the market is signaling a cyclical move, the current situation is volatile. Trump has yet to actually become the leader of the free world, we have no idea of the extent of his infrastructure projects, and he could still very well cause deep political conflict in the country. Most notably he may be more protectionist than the markets are pricing in.
A closed off America will arguably damage its growth and influence, and a flurry of Trump policies that are seen as deeply divisive and anti-social could cause geopolitical tensions to spill over into the markets. It’s important to keep a level head, but with BREXIT and EU tensions, alongside slowing growth in China, a bet on the U.S. looks positive.