United States Election Aftermath and Key Market Implications

The recent US elections is likely to have broad political and economic implications. Following a decisive outcome, with Republicans poised to control the presidency, Senate and the House, markets responded with an unprecedented post-election rally.

Leading into the election, market volatility increased as investors anticipated potential outcomes. The clear and decisive result provided much-needed clarity, easing concerns over a contested election. This removed a key source of uncertainty and led to a significant reduction in volatility.

However, as with any significant political shift, investors are now assessing the broader market implications.

Policy Implications: Potential Tailwinds and Challenges

Tax Cuts and Deregulation

A significant part of President Trump’s campaign promises involved extending the 2017 Tax Cuts and Jobs Act (TCJA), set to expire in 2026. This includes extending individual tax rates and pursuing additional corporate tax cuts.

Combined with deregulation initiatives, these policies could drive corporate spending and boost economic growth. This may be particularly advantageous for cyclical and smaller-cap companies, which have already shown positive momentum post-election.

The financial services sector has been a standout, with regional banks seeing a 10% rise on hopes for lighter regulations and an improved merger-and-acquisition landscape.

Inflation and Debt Concerns

The flipside of expansive fiscal policies is their cost. The continuation and potential expansion of tax cuts are estimated to add nearly $5 trillion to the national deficit by 2034, according to the Bipartisan Policy Center¹.

With government debt already at about 122% of GDP, further increases could elevate inflation risks and result in interest rates remaining elevated for longer.

Market participants are keenly watching for any signs of inflationary pressures that might necessitate more aggressive monetary policy responses. Bond markets reflected these concerns in early November, with the 10-year Treasury yield reaching a four-month high before easing after the November 7 US Federal Reserve (Fed) meeting.

The Federal Reserve’s Position

Amid the political shifts, the Fed’s monetary policy remains a crucial factor.  The Fed recently cut rates for the second time in this cycle, bringing the policy rate to 4.5% – 4.75%.

Federal Reserve Chairman, Jerome Powell, has signalled that while the Fed views current rates as restrictive, it will respond cautiously to policy changes until they are implemented. Market sentiment has adjusted accordingly, now pricing in a shallower rate-cutting cycle. While three additional rate cuts are expected by the end of next year, this marks a reduction from the six projected only a month ago.

Potential Impact on Australian Investors

President-elect Trump’s proposed policies, including tax cuts and deregulation, could have indirect effects on Australian investors. An increase in US economic growth driven by these policies may lift global equity markets, benefiting Australian portfolios with exposure to international stocks.

However, higher US inflation and subsequent interest rate increases could strengthen the US dollar, impacting currency valuations and potentially impacting returns for Australian investors holding US assets. Additionally, rising US yields might make American bonds more attractive, potentially leading to a revaluation of global fixed-income allocations.

Australian investors should also consider the potential ramifications of any renewed tariff policies on China. In past years, Trump’s tariffs on Chinese goods created ripples through global trade, impacting commodity prices and supply chains.

For Australia, which has deep economic ties with China through exports such as iron ore, any escalation in US-China trade tensions could lead to volatility in key sectors of the Australian economy. This might affect sectors ranging from mining to agriculture, and indirectly influence the Australian equity market and currency.

Adapting to a changing landscape

Examining Equity Exposure

With potential tax cuts and deregulation serving as tailwinds, investors may consider sectors that could benefit from pro-growth policies. The market’s rally beyond the technology sector signals an opportunity for broader market leadership.

Fixed Income Opportunities

For fixed income, the recent rise in yields offers a chance to lock in attractive rates. Although the pace of Fed rate cuts may slow, current yields present a potential entry point for investors looking to extend the maturity of their portfolios. Intermediate- and long-term bonds may provide stability and benefit from anticipated rate declines over time, particularly as cash investments see lower returns in alignment with Fed policy shifts.

Maintaining Focus on Fundamentals

While new policy proposals will evolve over time, investors may be wise to concentrate on long-term fundamentals. The US economy has consistently defied recession expectations, bolstered by consumer spending, rising incomes, and strong corporate earnings. According to Reuters, S&P 500 earnings are expected to accelerate from 3% growth in 203 to 11% in 2024, and potentially 14% in 2025. 

Conclusion

The post-election market environment, marked by the potential for tax cuts and deregulation, offers a cautiously optimistic outlook for equities while posing potential challenges for the bond market amid inflation and debt concerns.

Investors may consider focusing on maintaining a diversified portfolio, leveraging market opportunities, and positioning for long-term stability. History shows that while political shifts can lead to short-term volatility, a well-thought-out investment strategy can withstand such changes and help achieve consistent progress toward financial goals.

To discover more call 1300 683106 or email us on investordesk@nab.com.au

¹ https://bipartisanpolicy.org/blog/the-new-cost-for-2025-tax-cut-extensions-5-trillion/

The information contained in this article is believed to be reliable as at November 2024 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.