“Investors think they know who they are dealing with in Trump. They probably do. But that “probably” is a bit dangerous here. The man is hard to predict. He is not bound by history or his past statements. The distribution of outcomes for his presidency will have fat tails. So, while the central forecast for markets has to be more of what we saw yesterday, we have to think hard about other possible outcomes.”
Robert Armstrong, US Financial Commentator for The Financial Times and author of daily newsletter Unhedged, Nov 7, 2024
The US election has come and gone, and we are moving on without incident as feared with the transfer of power. Even so, the election might raise more questions than it answers, as Mr Armstrong rightly pointed out (quote above) in Unhedged on Thursday. The election and its aftermath last week largely over-shadowed decisions by the Bank of England and the Federal Reserve, both of which – as expected – lowered their policy rates by 25bps on Thursday. Markets were volatile, with investors piling into the so-called “Trump trade” before the election, and doubling down after his victory. Clearly, US equity investors liked the outcome, although sector performance varied. Bond investors liked the outcome less so initially, although yields did “round trip” on the week. The S&P 500 chalked up a 4.7% gain on the week, closing at three consecutive record highs following Mr Trump’s election and going above 6,000 intraday for the first time on Friday. The 10y UST yield closed on Wednesday at its highest level since June 2024, but actually ended the week lower than it started it.
From my perspective following a couple of days of reflection, the four most interesting points about the US election – and observing how markets reacted afterwards – are:
The “reach” of the US election: To many Americans that have never lived outside of the US, what happens outside of America matters little. However, the reality is that the world is more inter-connected today than ever. The reaction of other countries to Trump 2.0 has been profound, with right-leaning more populist leaders (like Hungary’s Vickor Orbán) cheering Mr Trump’s triumph, while many of America’s long-standing allies are fearing what Trump 2.0 could mean economically and politically for their countries. In some respects, president-elect Trump is an open book. However, he is also unpredictable and emotional, which makes it difficult for the world stage to know exactly what might be coming. Naturally, the immediate implications could be in Ukraine and Israel, where Mr Trump has clearly indicated that he wants to tamp down the former conflict, but seems more complacent about the latter. These policy positions are well-known. However, the collateral effects of his economic policies are less clear, which on the surface seem inflationary in the US and damaging to bilateral trade (i.e. tariffs). As an anecdote, it was interesting that at the Bank of England’s press conference following their monetary policy decision on Thursday, there were quite a few questions about the effect of Trump 2.0 on the UK economy, showing the global reach of concern with Mr Trump’s victory.
The reaction of the stock and the bond markets following the election: If the polls and betting sites weren’t enough to convince folks that Mr Trump would prevail, the behaviour of the US stock and bond markets ahead of the election seemed to be a sure indication. However, what happened after the election was dramatic, with the long side of the “Trump trade” taking off like a rocket and the short side floundering. Of course, there was no single beneficiary as great as Mr Trump’s sidekick Elon Musk, as shares in Tesla soared nearly 15% on the day following the election. Many sectors stand to benefit from the Trump presidency, including energy companies (especially services), domestic automotive manufacturers, banks/financial services firms, small cap domestic-focused companies, and anything crypto-related. Other sectors – including renewable energy companies, real estate companies, utilities and especially companies that rely on imports from China, including many US retailers – might suffer. Mr Trump’s occasional rants against the tech giants make the effect on their shares less clear, although all rallied along with the general market last week, perhaps from hopes for a more “regulation-lite” approach. Bonds initially slumped as yields headed higher, a trend that started weeks ago as the probability of a Trump victory increased. However, by the end of the week, yields had more than returned to where they had started the week.
The extensive mandate given to president-elect Trump and the Republican party: A resounding victory by Mr Trump in both the electoral college, which counts, and the popular vote, which does not, was certainly not expected. But even more surprising to many was the mandate given Mr Trump and his Republican party via his control of the Senate and likely control of the House. This is an indication of the drift of America in general to the right, as well as an indication of the rather broad rejection of the performance of President Biden and his administration over the last four years. It is easy to say that Americans don’t understand how strong the economy is in so many respects today, but the reality is that inflation – although pandemic–induced because of fiscal and monetary stimulus staying in overdrive for too long – proved to be much more influential (and detrimental) than Democrats expected. As a result, Democrats failed to connect with their core legacy constituency, largely consisting of “ordinary Americans”, including the middle and lower-middle class. These Americans feel the pinch of higher prices far more than more affluent Americans. Of course, higher bond yields and easy money have fuelled remarkable returns for net savers, but have proven extraordinarily painful to net borrowers. Voters have chosen to turn the page and take their chances with the highly unorthodox Mr. Trump rather than have four more years like the last.
The polls and betting sites: Mr Musk tweeted on Thursday that the polls lied about the tight Presidential race. I consider this a stupid comment (like many on X) in that polls have proven wrong time and time again over many years, certainly not something unique to the 2024 US presidential election. Remember the BREXIT referendum in 2016? However, the “new kid on the block” was on-shore betting sites (i.e. brokerage firms), the regulatory approval of which led to more focus generally on global political betting sites. The reality is that punters called this election exactly right. This isn’t the first time that betting sites have been a more accurate predictor of an outcome than polls.
WHAT MATTERED LAST WEEK
The US election: I covered the run-in and immediate after-effects of the US election in my blog, and you can find the articles here should you wish to go back and read them:
The US election: things you should know (4 min read)
The US election: the morning after (3 min read)
FOMC decision: Just as expected, the Federal Reserve lowered the benchmark Fed Funds rate by 25bps on Thursday, reducing it to a band of 4.50% to 4.75% (FOMC statement here). The short FOMC press release provides little colour as usual, sticking to the narrative of the Fed’s twin mandate of getting inflation back to 2% and keeping the jobs market humming (so-called “maximum employment”). The follow-on press conference with Mr Powell was much more interesting in that many of the questions were about the potential effect on Fed policy going forward given Mr Trump’s expansionary and inflationary fiscal policies espoused on the campaign trail. As an aside, even if Republicans control both chambers of Congress, I suspect there will be a responsible contingent in the Republican party that will be unlikely to waive through deficit-increasing measures, certainly not on a carte blanche basis as Mr Trump hopes. I believe that Mr Powell knows this, and deflected questions accordingly by saying (rightly) that the Fed cannot react to the just-elected new administration until it is in place and has started to alter fiscal policy. Right answer. Perhaps the most interesting part of the press conference though was when Mr Powell was asked if he would resign if Mr Trump asked him to, to which he offered a curt “no”, answering the same way when asked if such a request would be legal. Once Mr Trump is sworn in, the interaction with Mr Powell and the Federal Reserve will be interesting, although let’s hope that the Fed remains off limits to any influence from the Executive Branch. If you want to watch the interesting Q&A following the FOMC decision, you can access it here.
Bank of England decision: The Bank of England lowered its be benchmark overnight Bank Rate by 25bps on Thursday, to 4.75%. This is the second reduction in the policy rate since August (2024) and – in an 8-1 decision (with the one dissent voting to hold the rate constant) – was decided as inflation in the UK in September fell to 1.7%. However, BoE head Andrew Bailey was very cautious in his outlook, noting:
The base rate effects in the calculation mean that inflation will likely be higher at the end of the year,
Ongoing service inflation remains elevated, at 4.9% in September,
The stimulus effects of the new Labour budget, and the effect of additional borrowings needed to fund the plan, are likely to put pressure on prices, and
The “great unknown”, i.e. what the incoming Trump Administration might do in its “America First” agenda to influence growth and inflation in the UK economy, including the potential imposition of tariffs.
Below is an extract from the BoE Monetary Policy Decision that provides a good summary of this decision and what might lie ahead:
“CPI inflation fell to 1.7% in September but is expected to increase to around 2½% by the end of the year as weakness in energy prices falls out of the annual comparison. Services consumer price inflation has declined to 4.9%. Annual private sector regular average weekly earnings growth has continued to fall but remained elevated at 4.8% in the three months to August. Headline GDP growth is expected to fall back to its recent underlying pace of around ¼% per quarter over the second half of this year. The MPC judges that the labour market continues to loosen, although it appears relatively tight by historical standards.”
Bank of England Monetary Policy Statement, November 2024
MARKETS LAST WEEK
Global equities were better in Asia and the US, but weaker in Europe. Chinese equities were surprisingly the best performer last week, as concerns over potential new Trump tariffs were more than swept aside. On Friday, the Chinese government announced a $1.4 trillion equivalent fiscal stimulus plan focused on addressing bad real estate loans held by local governments / authorities, although investors largely seemed indifferent. US Treasury yields skyrocketed during the first half of the week but then settled by the end of the week, reflecting the Fed’s decision to reduce the Fed Funds rate and the likely trajectory of monetary policy ahead. The Dollar initially rallied hard, but then also settled as yield pressures subsided, although it ended the week with a gain. The price of gold fell, perhaps reflecting the end of risks associated with this election cycle. Bitcoin was one of the biggest beneficiaries of the election of Mr Trump, increasing to record levels.
The tables below show the performance of the various indices and asset classes tracked by EMC in the past week, reflecting the effects of the US election and two important central bank decisions.
MY TRADES LAST WEEK
I was active just before the election, writing short dated covered calls on AAPL, AMZN, BRK (closed out), and GOOG. They all looked like smart trades until stocks went nuts after Trump’s landslide victory. All of the shares popped, although I managed to close out one position booking a gain, and reduced or rolled forward the others. I added more covered calls on Thursday as stocks continued to run, mainly focused on Mag 7 names. In addition – and probably for the final time – I rolled SPY puts due Dec 31 to Mar 31 (2025), and increased the strike price to 555, as insurance against the early weeks of a Trump presidency. I also exited ABNB finally, a painful position for several years. As usual, my sense of timing was not perfect in that the company delivered good numbers on Thursday after the close, causing the shares to soar in the after-market, but they gave back these gains and more during Friday’s session, losing ground as concerns over tighter margins took centre stage. Good riddance!
WHAT’S AHEAD
Monday is a US federal holiday (Veteran’s Day), with the bond market closed but the stock market open.
Economic data: Next week, focus as far as US data will be on CPI, PPI and retail sales for October. Many Fed talking heads will be speaking at various events, include Mr Powell, who will testify on the economy on Thursday before the House Committee for the Budget. We also get preliminary 3Q24 GDP figures for the UK, the Eurozone and Japan next week.
Earnings: 11 additional S&P 500 companies will report earnings next week, largely capping this round of earnings. To see where we stand, check out “This Week in Earnings” (LSEG I/B/E/S) or “S&P 500 Earnings Season Update”(FactSet).
Monetary policy meetings:
ECB: Dec 12
FOMC: Dec 17/18
Bank of Japan: Dec 18/19
Bank of England: Dec 19
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