What impact will Trump’s victory have on the U.S. stock market?
Witnessing history, the dust settles. In the early hours of today, Trump reclaimed the White House, becoming the 47th President of the United States. The Republican Party also secured the Senate and is very likely to win the House of Representatives, achieving a red sweep. The market reacted swiftly, with the Dow Jones soaring by 3% today, marking its strongest performance in over two years. The small-cap Russell 2000 also surged by 4.5%, while Bitcoin hit a new high, briefly surpassing $75,000.
Last night, Trump took an early lead in all the swing states, securing victories in North Carolina, Georgia, Pennsylvania, and Wisconsin, ultimately winning with 277 to 224 electoral votes, becoming the 47th President of the United States. The significance of this victory is profound as Trump’s lead nationwide is even greater than in 2020, indicating a stronger support from the people. At the time of Agi’s deadline, the Republican Party also managed to flip 3 seats in the Senate, gaining control. Currently, the Republicans are also leading in the House of Representatives, only 18 votes away from a majority, achieving a true red sweep.
In the market, assets related to Trump’s presidency surged collectively, with Trump Media & Technology Group soaring 24% at the opening, and Tesla rising over 15%. Not to mention assets like Bitcoin and small-cap stocks. As a result, U.S. Treasury bonds fell, with the long bond ETF TLT dropping by 3%, causing a spike in bond yields, with the 10-year Treasury yield surpassing 4.4% and the 2-year Treasury yield approaching 4.3%. Clearly, Trump-related trading is unstoppable in the short term. For those who made money today, Agi would like to extend congratulations.
So, what is Wall Street’s initial assessment of this election result? Goldman Sachs has indicated that if the Republicans narrowly secure the House of Representatives, Trump’s tax cuts passed in 2017 will be extended promptly, with Republican lawmakers supporting further tax cuts to fulfill Trump’s campaign promises. However, the company believes that the final tax cut magnitude may not be as significant and will likely focus on income taxes initially. Defense spending may see a slight increase under Republican leadership, but overall fiscal expenditures will not expand significantly.
In terms of tariffs, Goldman Sachs points out that it is relatively easy to further impose tariffs on China. It is uncertain whether the 60% increase touted by Trump can be achieved, but adding another 20% on top of the current basis is highly likely. As for comprehensive tariffs, which means imposing at least a 10% tariff on all imported products, Goldman Sachs believes there is a 40% possibility, but it will definitely face strong resistance. If these tariff policies are implemented, it will ultimately lead to a one-time increase of 30-40 basis points in core PCE and will have a slight drag on GDP.
Regarding immigration, Trump’s presidency will certainly lead to a significant reduction in immigration, with preliminary estimates indicating around 750,000 per year, lower than the pre-pandemic level of 1 million per year. The key issue is that it is currently unclear how Trump plans to carry out his large-scale deportation of illegal immigrants, and what impact this will have on the economy.
The above is more of an economic evaluation. However, from an investment perspective, focusing solely on the election-related aspects, there are certain hidden concerns. It must be emphasized here that considering risks and political positions are unrelated. Many people see me summarizing some negative impacts of Trump’s policies and say I am anti-Trump. To be honest, I really am not.
So, what are these hidden concerns being referred to here? The biggest concern is inflation and the stance of the Federal Reserve. Whether it’s tax cuts, tariffs, or deporting immigrants, all have the potential to push up inflation and disrupt the Fed’s pace of interest rate cuts.
The market has also reacted accordingly. On the CME, the likelihood of the Fed pausing rate cuts in December is increasing, rising from 22% yesterday to 29%. The expected rate cuts for next year have also significantly decreased. Previously, the market expected rates to fall below 3% by the end of 2025, but now it’s 3.75%. This means that if the Fed cuts rates in December, it will only cut twice next year. The surge in US bond yields can also be understood as the market pricing in higher inflation. Overall, there is a continuation of higher and longer rate expectations.
So, one question that must be asked is whether the Federal Reserve will actually pause? In fact, we should consider two scenarios. The first scenario is that the Federal Reserve is still in a rate-cutting cycle, just choosing to skip a few meetings, which would have a smaller negative impact on the market. The second scenario is that the Federal Reserve, with interest rates still relatively high, decides to completely halt. This is undoubtedly the scenario the market least wants to see. Because once the Federal Reserve signals a complete halt, it could likely mean that the threat of inflation has become significant enough, perhaps in preparation for a rate hike. At that time, the market is very likely to once again fall into the rate hike panic seen at the beginning of 2022.
Bank of America says not to be too nervous. The Federal Reserve will not prematurely assess the economic impact of Trump’s policies, and is unlikely to act prematurely. However, if Trump does announce significant tariffs, the possibility of the Federal Reserve pausing will obviously increase. Nomura Securities believes that because the Federal Reserve misjudged inflation in 2021, it will be more cautious about any shifts, waiting for the one-time impact of tariffs to dissipate before considering a change in stance. In addition, the longer-term uncertainty surrounding the Federal Reserve has increased, as Trump has previously stated that he will not reappoint Powell. His term ends in May 2026. The next two years may cause market turmoil due to this.
So, does today’s sharp rise mean that all the good news has been released? Will there be a pullback in the future as emotions return to normal? Aggie believes that in the short term, the optimistic sentiment surrounding Trump’s victory will continue for a while, along with the risk release of the election outcome, so the current uptrend in the stock market should continue. Historically, it is also optimistic, as the two months following the election have seen very strong market trends. Therefore, we have reason to remain optimistic about the future performance of the U.S. stock market.
However, it must be noted that the market still has concerns about inflation and the Federal Reserve’s policy, which is the biggest risk in this current market trend. If these concerns come back into the spotlight in the future, it is not ruled out that the U.S. stock market may experience a pullback as a result. Here, Ajie believes that this risk can be divided into three levels. The most serious scenario, of course, is if the Federal Reserve signals a policy shift. This would lead to a fundamental change in investment logic, requiring specific analysis at that time. The second most serious scenario is if inflation starts to rise, but the Federal Reserve remains unchanged. In this case, I believe it is best for us investors to remain cautious and not blindly bet on a direction. The least serious scenario is when the market suddenly starts to worry about inflation and the Fed’s changes without any actual data support. Such an evolution may present an opportunity for us investors and is worth paying attention to.
Reference article: WeChat Official Account “MeiTouinvesting”
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