Macro Week W45: US Elections After The Deluge

The 2024 U.S. presidential election has concluded with a surprising outcome that’s sending shockwaves through global markets. Donald Trump has secured a second term in the White House, and Republicans appear poised to control both chambers of Congress. This macro week election article delves into the immediate market reactions and potential long-term implications of this political shift.

The Red Wave: Election Results and Initial Macro Response

Trump’s Path to Victory

Donald Trump’s victory became increasingly apparent as election night progressed, with the former president securing key swing states:

• Florida
• Ohio
• Pennsylvania
• Georgia
• Wisconsin (narrowly)

The Republican Party has already secured control of the Senate, flipping three seats from the Democrats. While the House of Representatives race is still ongoing, prediction markets and early results suggest a likely Republican majority.

Immediate Market Reaction

Markets have responded swiftly to the election results, with several key moves:

• S&P 500: Up approximately 3%
• Russell 2000 (small caps): Surging by nearly 6%
• U.S. Dollar: Strengthening 1-2% against major currencies
• 10-year Treasury yield: Rising to 4.47%
• Gold and Silver: Both down, with silver experiencing a sharper decline

Policy Implications of a Trump Presidency and Potential Red Sweep

Tax Policy and Federal Spending

1. Extension of Trump’s previous tax cuts, which are set to expire in 2025
2. Potential for additional, modest tax reductions
3. Increased federal spending, particularly in areas aligned with Republican priorities

Trade and Tariffs

• Renewed focus on “America First” trade policies
• Potential 20% – 60% tariff on Chinese imports
• Possible new tariffs on European auto imports
• Estimated 1% GDP hit for major trading partners (Europe, China, Japan, Germany)

Regulatory Environment

1. Rollback of regulations in energy, financial, and labor sectors
2. More business-friendly leadership at agencies like the SEC and FTC
3. Potential easing of antitrust pressures on big tech companies

Immigration and Labor Market

• Stricter immigration policies likely to be implemented
• Potential impacts on labor supply in certain sectors

Energy and Environmental Policy

• Possible rollback of some green initiatives
• “Drill baby drill” approach to domestic energy production
• Note: Complete reversal of green policies may face resistance due to vested interests within Republican constituencies

Market Dynamics and Sector Outlook

Rotation into Cyclicals and Small Caps

The market is witnessing a significant rotation, with several sectors and asset classes poised to benefit:

1. Financials: Deregulation and higher interest rates supportive
2. Small caps (Russell 2000): Tax cuts and domestic focus beneficial
3. Energy producers: Favorable regulatory environment expected
4. Construction and infrastructure: Potential beneficiaries of increased federal spending
5. Domestic security firms: Likely to see increased government contracts

Potential Headwinds

Some sectors may face challenges in the new political landscape:

1. Large tech companies: Potential for underperformance as investors rotate to other sectors
2. Firms with significant international exposure: Tariff concerns and strong dollar could impact earnings
3. Green energy: Possible policy shifts may create uncertainty

Crypto and Bitcoin

• Bitcoin and other cryptocurrencies seeing positive momentum
• Perception of Trump as crypto-friendly driving optimism in the sector

Federal Reserve and Monetary Policy Outlook

Interest Rate Expectations

• Market pricing out some expected rate cuts for 2024
• 10-year Treasury yield at 4.47%, with 4.6% seen as a potential inflection point for small caps

Upcoming FOMC Meeting

• Federal Reserve meeting on Thursday will be closely watched
• Focus on Jerome Powell’s comments regarding:
  1. Inflation outlook
  2. Policy path given new political landscape
  3. Potential impact of fiscal policies on monetary decisions

Seasonal Factors and Market Mechanics

Several factors beyond the election results could support further equity market gains:

Strong Seasonal Tailwinds

1. November and December historically strong months for equities

1. Effect often more pronounced in election years

Corporate Buybacks

• Approximately $100 billion in corporate buybacks expected in November alone
• Translates to about $6 billion per trading day of potential support

Institutional Positioning

• Many institutional investors were underweight risk assets going into the election
• Likely to increase exposure, potentially driving markets higher

Options Market Dynamics

1. Gamma: Current positioning could amplify market moves
2. Vanna: Falling volatility may force market makers to buy underlying assets, supporting prices

Risks and Watchpoints

While the overall market reaction has been positive, several risks and key levels should be monitored:

Treasury Yields

• Watch the 10-year yield, particularly around the 4.6% level
• Higher rates could pressure small caps and growth stocks

House Race Results

• Final outcome of House elections could impact market sentiment
• Any signs of Democrats retaining control could lead to volatility

Federal Reserve Response

• Thursday’s FOMC meeting and press conference crucial
• Any hawkish surprises could dampen market enthusiasm

Geopolitical Tensions

• Potential for increased trade tensions, particularly with China
• Market sensitivity to any provocative statements or policy announcements

Conclusion: Navigating the Post-Election Landscape

The 2024 election has ushered in a new era of Republican control, with markets rapidly adjusting to the changed political reality. While initial reactions have been largely positive, investors should remain vigilant to both opportunities and risks in this evolving landscape.

Key strategies for investors to consider:

1. Evaluate sector exposure in light of expected policy shifts
2. Monitor small cap performance relative to large caps
3. Stay attuned to interest rate movements and Fed communications
4. Consider the impact of a stronger dollar on international investments
5. Remain flexible and prepared for potential volatility as policies take shape, remember the inauguration is a way off yet

As always, maintaining a diversified portfolio and focusing on long-term goals remains crucial in navigating the post-election investment environment.