Trump’s second act: the winners and worries

On 20 January, Donald Trump will resume his place at the helm of the most powerful country in the world. On early indications, stock markets are delighted. The prospect of lower taxes and deregulation sent the S&P up 2.5% in a single day from already elevated levels. The bond market, however, was notably less enthusiastic about the win.

There has long been talk of a ‘Trump trade’. In reality, this was largely a pro-risk trade, favouring technology, bitcoin and Dollar on the assumption that President Trump will ‘juice’ the economy – cutting taxes and raising debt.

In the immediate aftermath of his victory, there were a number of clear winners. Tesla’s share price leapt*, rewarding Elon Musk’s loyalty, while other key beneficiaries included the banking sector, and oil stocks, which are expecting an easier regulatory ride under Trump. It was also a better run for US smaller companies: the Russell 2000 was up almost 6% on the day*.

We broadly agree with the market’s assessment. Deregulation should be good for sectors such as energy and finance, and Trump has achieved the ‘red sweep’ necessary to cut red tape. Smaller companies should also benefit from looser regulation and also from the ‘Make America Great Again’ agenda, which prioritises domestic manufacturing over foreign imports.

The impact on the Magnificent Seven is harder to call. These are global companies that could be hit by Trump’s tariff regime. Equally, if Trump’s agenda proves inflationary and interest rates need to stay higher for longer, it could be a tougher environment for high growth companies. They are already relatively expensive and a significant part of the index. All in all, we would favour balancing a weighting in large companies with active funds such as the T. Rowe Price Smaller Companies Equity or Schroder US Mid Cap funds.

For investors tempted to back away from the US altogether, it is worth remembering that the US is a fertile source of innovation and high growth companies. Gary Robinson, manager on the Baillie Gifford American fund, says: “While everyone else is talking about the election, in the Silicon Valley bubble, everyone is talking about AI. It could unleash the most significant wave of innovation I’ve seen in my career. It will change the way we do business, just as the Internet did 10-15 years ago.” He says there are astonishing leaps in areas such as autonomous driving that they are harnessing in their portfolio.

Outside the US

Trump’s policy agenda is also likely to have an impact outside the US. In particular, tariffs could weigh on global growth, particularly in Asia and Europe. Inflation expectations are already rising. While China is likely to bear the brunt of Trump’s tariffs, the incoming president has also promised tariffs of 10-20% on other countries. That makes global trade more difficult and expensive. Tit for tat tariffs are also a possibility, raising costs for everyone.

While global stock markets mirrored the US stock market’s gains in the wake of Trump’s victory, the cracks were already starting to appear. Renewable energy stocks, for example, saw weakness, as investors started to assume a rolling back of President Biden’s decarbonisation agenda. Wind farm group Orsted dropped 13% on the day*. It was a good day for defence stocks, which started to anticipate higher spending from European governments no longer able to rely on US protection.

Johanna Kyrklund, group chief investment officer at Schroders, and head of the multi-asset team (which runs the Elite Rated Schroder Global Multi-Asset Cautious Portfolio), says: “The key risk is on trade: we could start to hear pronouncements from Trump quite soon. In the short term, a protective trade stance is supportive of the US dollar and poses a risk to growth outside the US. We would expect the Chinese authorities to continue with stimulative policies to offset this.

“Europe becomes more of a concern, however, as it could then become caught in the crosshairs of a more hostile trade environment – without the unified leadership that is required to tackle it.”

Bond markets

The movements in the bond market are also worth noting. Trump’s policies on tariffs and tax cuts are expected to be inflationary. He is likely to raise the deficit by around $7.5 trillion, on top of an existing deficit of $35.6 trillion**. While the US is afforded special privileges, it may not be able to defer a ‘Liz Truss’ moment indefinitely. This has been reflected in longer-dated US bond yields, which have risen significantly over the past six weeks, in spite of a cut from the Federal Reserve, and spiked higher on news of a Trump victory*.   

If bond markets start to get nervous, it could prove destabilising for financial markets across the world. Trump has shown no inclination for fiscal discipline, but it is possible that he may have it imposed upon him by market necessity. It doesn’t take a significant spike in bond yields for US debt repayments to start looking very expensive.

This may also have an impact elsewhere. Bryn Jones, manager of the Rathbone Ethical Bond fund, says that the impact is already being felt in the gilt market: “As a result (of Trump’s victory), the Dollar is strong, risk markets are taking another leg higher and US treasuries are having a bit of a bath. Treasuries rallied yesterday as investors wrongly cheered a Harris win. That has completely reversed overnight, and some with yields having first fallen 7 or 8 basis points yesterday, have subsequently risen 17 basis points.

“But what we cannot afford to miss is that the gilt market continues to struggle …The massive increase in borrowing costs since last week’s Budget has wiped out all of Reeves’ fiscal headroom.” He urges the government to stabilise borrowing costs.

While there has been some early cheer for a Trump victory, there are plenty of risks, particularly outside the US and these may be priced in over time. The Trump train may move domestic stocks upwards in the coming months, but it could also unsettle global equities in the long run.

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*Source: MarketWatch, 6 November 2024

**Source: AP, New analysis suggests national debt could increase under Harris, but it would surge under Trump