As dawn broke over Washington, D.C., on November 6th, it became evident that Donald J. Trump had once again confounded the sceptics to secure a decisive victory in the U.S. Presidential race.
He was elected as the 47th President of the United States, becoming only the second leader in history to serve a non-consecutive second term. With his imminent return to the White House, the stock market responded positively in the weeks following his win, signalling renewed investor confidence. We all ask ourselves – why?
Rally in US Shares
Firstly, as Trump won the presidency, the Republicans effectively secured a ‘clean sweep’ by securing a majority in both the Senate and the House of Representatives. No Republican President has achieved this for over 20 years.
Markets don’t like uncertainty – investors in the US were relieved to have a clear election winner and were enthused about the prospect, thanks to controlling both houses, of tax cuts and deregulation, which ultimately drove the US stock market higher.
The table below illustrates that the US stock market – and Tech shares in particular rose more quickly than other world markets.
Market Index
% Change 5/11/24 – 11/12/24*
US Tech Shares (NASDAQ)
+ 10.2%
US Shares (S&P 500)
+ 6.5%
UK Shares (FTSE-100)
+ 1.4%
Japanese Shares (Nikkei 225)
+ 2.3%
*Yahoo Finance 11/12/2024
Those figures cover just over 5 weeks and show the significant rally in US shares, in what had already been a strong year.
Not everything has been performing well
The U.S. bond market has raised concerns that Trump’s tax cuts could add trillions to the national debt (already at $38 trillion) and that his proposed tariffs and other policies could stoke inflation.
The market in US Treasuries (the American equivalent of our UK Government Bonds, or Gilts) perhaps beginning to suspect a potential Trump win in the run-up to the election, sold off in the weeks before Election Day, and US Treasuries continued to fall as the full scale of Trump’s victory was digested around the world.
Why have we seen a pullback in US Bonds?
Firstly, investors suspect the economy will grow even faster under Trump’s leadership, prompting a shift from bonds to shares in the U.S. As noted earlier, U.S. shares have surged since the election.
Secondly, the market is factoring in the likelihood of larger government deficits driven by Trump’s proposed tax cuts.
While the US national debt was expected to increase significantly no matter who won the Presidency, the impact is viewed as potentially bigger under Trump.
This could lead to a rise in inflation as prices would possibly rise faster under Trump due to his low-tax, low-regulation policies. There is also the issue of the cost of tariffs – mooted at 60% on Chinese imports. Whilst Chinese imports could become more expensive, it’s ultimately the American buying public that will pay. And rising tariffs could equate to rising inflation.
The fact that Bonds have fallen somewhat (and yields have therefore risen) suggests that markets feel that the combination of potentially higher inflation and faster growth under Trump will force the US Federal Reserve to scale back its plans for interest rate cuts.
This doesn’t mean interest rates won’t fall; just that they may fall more slowly than was predicted earlier this year.
What about the UK?
With the drama of the recent US election, it’s easy to forget we had a UK General Election in July and the new Chancellor’s first Budget in October.
If the markets are to be the Judge – then the Jury is still out.
UK Shares (in the shape of the FTSE-100) have barely moved since the election, although they continue to deliver good dividends. The same can be said for the UK Government Bond market, in the shape of Gilts.
Even though Rachel Reeves increased borrowing by £40bn in her Budget, the Gilt market barely shifted. We all remember the impact of Liz Truss’s Budget 2 years ago and how that sent borrowing costs soaring; but early indicators are that the dial has not shifted significantly.
The non-reaction to this Budget can therefore be viewed as a cautious acceptance by the markets, if not a full-throated vote of confidence.
Rather like the US, the consensus in the UK is that rates will continue to fall, but not quite as quickly or by quite as much. But the US inflationary risks which may be worrying markets in the US seem less likely to be of concern in the UK; Bank of England projections are that inflation will stay in the 2% to 3% for the next 2 or 3 years.
A foot in both camps – or several!
Diversification is the key to managing risk whilst aiming for investment growth ahead of inflation.
Investing across both the U.S. and the U.K. while also diversifying globally helps reduce risk by creating a geographical balance in your portfolio. Similarly, holding a mix of shares and bonds spreads your asset risk, as investing in different types of securities enhances overall resilience.
Our next article will look more closely at recent changes to asset allocation within our Discretionary Model Portfolios – so watch this space!
The concepts and suggestions in this article must not be viewed as advice. As always we recommend you approach a Financial Adviser who will take your circumstances into full consideration before providing advice.
Please be aware that the value of investments linked to the stock market may rise or fall depending on market conditions and that you may not always recoup your initial investment. Past performance should not be seen as an indication of future returns.