Post-Election Update
This week, Donald Trump became the first president since the 1890s to regain the White House after losing the previous election (you’re no longer alone, Grover Cleveland). Other than this historical marker, what does that mean for the markets, the country, and the economy? We broke down some key points down below:
Key Takeaways:
A Republican controlled Congress increases the potential for significant policy changes, including tax cuts, deregulation and higher tariffs. The size of the Republican majority in both chambers will be key, as will Trump’s own priorities once in office.
U.S. equities remain supported, particularly on the back of robust growth and broadening earnings. However, risks around higher long-end yields and tariff implications don’t seem to be reflected in market prices and could generate volatility ahead.
Bond yields likely to remain volatile and elevated on the back of fiscal concerns, while trade uncertainties contribute to dollar strength and FX volatility.
Markets can thrive under various government configurations and diversification can help balance portfolios against unknown risks.
Finding the Signal Through the Noise
The positive equity market reaction has focused on the prospects of pro-growth policies and deregulation, overshadowing the risks of tariffs and rising deficits. As such, beneficiaries of deregulation such as small caps, banks, onshore energy and steel producers and cryptocurrencies have risen. The bond market has been more sober, focusing on the likelihood of an even wider deficit pushing rates higher, with the yield curve steepening as long-end yields rose more than short-term rates. Notably, this trend has been ongoing, with the U.S. 10yr rising from 3.7% to 4.6% since the Fed cut rates on September 18th. Elsewhere, currencies have reacted to potentially higher U.S. yields and tariffs, strengthening the dollar across the board. While many of these market reactions were anticipated, they may not be sustainable.
We now know the election outcome, but investors still lack clarity on policy implementation, a key indicator for investment implications. Indeed, actual policy action often differs from campaign rhetoric. As such, we would exercise caution against chasing recent market movements and suggest focusing on what we do have clarity on.
3 Principles for Navigating Political Uncertainty
The economy and markets have done well under a variety of government configurations.
While presidential elections are consequential for their influence on the trajectory of policy, equity market returns through various presidential terms tend to be positive, and ultimately driven by the macro environment.
For instance, despite two very different administrations under Obama (’09-‘17) and Trump (’17-‘21), market performance was nearly identical. The S&P 500 returned an average annual 16.3% and 16.0% under each administration.
Policy can have an impact – but it’s often not the strongest driver of returns.
Investors often consider how they should position portfolios based on election outcomes. However, it is very difficult to construct reliable investment strategies based on different policy implications.
For example, President Trump campaigned vigorously to support the traditional energy industry during his presidency. Yet the S&P 500 Energy index was down -40% under his term, while the S&P 500 Global Clean Energy index was up 275%. On the other hand, Biden campaigned on scaling back fossil fuels and galvanizing renewables and successfully passed a $369Bn commitment with the Inflation Reduction Act. Yet the S&P 500 Energy index has more than doubled and the S&P 500 Global Clean Energy index is down over 50% so far in his term. Macro forces ultimately drove markets: varying supply/demand and interest rate environments mattered more than any policies or intentions by the White House.
The best defense against the unknown is a diversified portfolio.
Markets know what to do with risks they know, and an election outcome – regardless of the results – provides some clarity on policy direction. However, Washington still faces significant fiscal challenges and greater policy uncertainty under a Red Sweep compared to a divided government could keep volatility elevated. For investors, the best defense against the unknown risks remains diversification. This message is even more important today given the rise in equity valuations, the concentration of U.S. equities in global stock markets and the concentration of mega-cap growth stocks in U.S. equities.
This commentary reflects the personal opinions, viewpoints and analyses of the Beta Wealth Group team providing such comments, and should not be regarded as a description of advisory services provided by Beta Wealth Group or performance returns of any Beta Wealth Group client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Beta Wealth Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
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