Post Election Rally Takes a Pause
What happened last week?
The S&P 500, Dow and Nasdaq shed -2.08%, -1.24% and -3.15%, as investors pared back their Fed rate cut expectations.
With just eight trading days since US election results, the market value of US equities has increased $2 trillion, or 3%. The US dollar has gained 3% against an index of the most liquid, traded currencies.
Measured in the now appreciated US dollar, share prices outside the United States have fallen 2.9% or about $750 billion. In essence, the slogan “America first” played out in global markets over the past week.
Even the value of gold has withered a bit against the mighty greenback (-6.5% since election day). In contrast, hopes of de-regulation and adoption in a Trump administration have sent cryptocurrencies higher.
What does this mean for investors?
Changes in the value of a currency vis-à-vis another is a zero-sum game of winner versus loser. The same is not true for equities. Fiat currencies generally “inflate away,” losing value in their purchasing power of goods and services over time. But over time, the economy is able to produce more goods and services as technology improves and contributes more, while an expanding human population works more hours. Therefore, owning the productive capital of the economy can generate sustained returns, theoretically in perpetuity.
3 Things to Know
Returns Can Be Positive Across Global Equities
We should not forget that EPS gains were broadening across sectors and regions before attention turned to the US election. EPS declined for many firms in 2022-2023 while labor markets were strengthening.
Excluding the Magnificent 7 large cap US tech related firms, EPS was down roughly 7% for other S&P 500 firms and for non-US firms in 2023. This makes 2024 only the mere starting point for a profit rebound.
A return to “trade wars” can introduce new volatility in markets in 2025, but when looking at the full period to the end of 2018, global markets still came out with solid gains. This was far broader than the US even with the trade friction period of 2018 and the Fed tightening cycle that preceded the pandemic.
Can US Equities Keep Growing at its Current Pace?
The share price gains from the 2016 election through 1H 2017 suggests promise.
For example, in that six-month period, banks gained far more than they have in the past few weeks. As discussed in last week’s CIO Bulletin, to the extent that Fed rate cuts steepen the US yield curve, it generates improved economics for lenders.
Expectations of deregulation have already boosted large bank share prices, but the gains have come on low valuations and severe underperformance for nearly two decades.
USD May Peak but Equities Rally Could Continue
When we think about the market reactions to the US political changes, we must attempt to separate the discrete repricing of certain expectations and distinguish these from the lasting factors (i.e. “zero sum” vs “enduring growth drivers”).
On the discrete side, the hope for lower tax rates on US business drove a stronger view of US economic growth relative to other economies following President Trump’s election in late 2016.
As tax rates don’t drop every year, this was largely priced in discretely with a “lurch” up in the real value of the US dollar, reaching a peak as 2017 began. Similarly, 10-year US Treasury yields jumped 57 basis points from election day 2016 to year end.
While US yields rose further through 2018, this was during a Fed tightening cycle with 200 basis points of rate hikes through the end of that year.
The rise in the US dollar and yields in late 2016 was indeed highly discrete, with increases only following the 2020 pandemic events more recently.
The Republican sweep in the 2016 election extracted a quick “toll” on non-US assets before positive returns resumed. However, this was likely influenced by the long delay in forming the first Trump administration.
The US didn’t raise tariffs on China until 2018. The new administration now promises to quickly resume where it left off.
See our weekly CIO Strategy Bulletin for more details