US Election Update
You've likely heard that Donald Trump convincingly won this week's US Presidential election. He becomes only the second President to secure non-consecutive terms in history. It turned out to be a sweeping victory with voters seemingly attributing the high inflationary environment that followed the Covid-19 pandemic to Joe Biden and the Democrats, despite the US economic recovery significantly outpacing all other G7 nations.
Summary
- Trump won both the popular vote and the electoral college.
- Republicans will hold a majority in the Senate, but this will be slim enough that Democrats have a reasonable chance at stymieing proposed changes in legislation.
- Republicans currently have a small lead in the House of Representatives while more votes are counted. Assuming a majority, they will be strongly placed to enact their policy agenda.
- The impact on share markets will depend on what areas of policy are enacted.
- Trump has proposed tax cuts and deregulation which will support equity markets in the short-term.
- Tariffs, lower immigration and increased geopolitical instability will likely hurt markets. Tariffs would likely re-establish higher inflation in the US.
- Sharemarkets are generally more expensive now than when Trump took office in January 2017 and thus more susceptible to negative policy settings and news.
- We think regardless of the policy mix, the outlook for bonds is poor given prospects for greater government deficits and more inflation.
Assuming the Republicans take the House (and can therefore enact their agenda to the greatest degree) we think the equity market impact will be mixed. Generally, there is a very wide gap between the policy proposals of a campaign platform and what is legislated. Even with complete Republican control of the Senate and House in 2016, President Trump was unable to fully enact his agenda. Congresspeople in the US are not obligated to tow the party line like in Australia and they often vote against their party platforms. Regardless, we can summarise the platform and categorise it into pro and anti-market items:
Overall, the policy platform (if fully implemented) is roughly neutral for shares, but bad for bonds. Importantly, there is a feedback loop between bonds and equities that needs to be considered. If an increase in bond yields is too large or too fast like in 2022, share markets will react negatively. Share markets have so far reacted positively to the election result, likely expecting that it will be easier for Trump to legislate tax cuts and deregulation through a Republican-controlled Congress than enacting higher tariffs (which will upset much of the business community). However, if he walks away from a tax cut agenda equity markets could easily swing the other way.Got questions?If you'd like to talk to your financial adviser about any potential impact on your strategy or portfolio, feel free to get in touch.
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The information in this email is for a general nature only and should not be relied upon to make any decision or taken as advice tailored to your personal circumstances. The material is based upon information which we consider reliable however may not be accurate or complete, and it should not be relied upon as such. At Verse Wealth Pty Ltd, our recommendations are tailored to your personal circumstances and provided to you in a Statement of Advice (or Record of Advice, where applicable).
