While the US presidential election outcome isn’t confirmed yet, Donald Trump is in the lead at the time of writing. With three swing states – Pennsylvania, North Carolina and Georgia – already called for Trump by the US media, he’s also slightly in the lead in the remaining four key states of Michigan, Wisconsin, Nevada and Arizona. A candidate needs 270 electoral votes to win the Presidency. At the time of writing, Trump stands at 267, Kamala Harris at 224.
In addition to the Presidency, American voters cast their ballots on the full House of Representatives and one-third of the Senate. Preliminary results suggest a close contest in the House, but the Republicans are currently leading and are on track to secure a majority. As expected, Senate control looks poised to shift from Democrats to Republicans. If this ‘Red sweep’ were to happen, it would enable Trump to implement more of his programme – including fiscal measures such as tax cuts and tariff increases on emerging markets (and potentially Europe).
In the coming weeks, we could see some volatility. However, it’s also possible that clarity on the US elections reduces uncertainty for some time. It’s worth noting that between 1936-2023, the S&P 500 delivered an average annual performance of 15-16% in periods when the US had a split Congress, compared to 12% when there was a united Government. Perhaps this is because of the volatility created by a unified government being able to deliver more significant policy changes.
Obviously, we’d need to see the final results. Based on US laws, the next important date is 11 December, when all vote reporting, counting (and recounting) stops. Six days later, all 538 members of the Electoral College will meet, with at least 270 votes needed to elect the next US President. The result of the election is then sent to the new US Congress, which will convene for the first time on 3 January 2025 and officially validate the Electoral College on 6 January. Finally, on 20 January, the 47th US Presidential inauguration starts.
As we write, financial markets continue to react to the news. Asian stocks are softening, while the S&P 500 futures (financial instruments that could anticipate the equity market reaction once the US opens) gained and are now close to their all-time high. We have a slight tactical equity overweight, which we combine with a preference for short-dated government bonds and high-quality corporate bonds, while we’re typically underweight risky bonds.
We think a Trump lead could signal gains in oil & gas, financial and telecom stocks, as deregulation would benefit these sectors. It might also – at least at first – be positive for US equities more generally, given a sizeable fiscal boost and, therefore, faster US economic growth, which could support the industrials and materials sectors. The impact on technology firms is likely to be more nuanced, with some uncertainty on possible antitrust actions but also tax cuts potentially boosting capital expenditure, possibly a net positive.
Tariff increases would negatively impact emerging markets, which is one of the reasons why, tactically, we currently don’t have active positions in those regions. If applied to NATO allies, tariffs may impact Europe too, and if they were to result in higher US inflation, the US consumer sector might be negatively affected.
As higher US fiscal deficits look likely, 10-year US Treasury yields jumped by 14 basis points to 4.41%. We’ve so far stayed underweight US Treasuries on concerns that a large fiscal stimulus might result in a significant supply of government bonds (a wider budget deficit leading to higher government debt), lowering their price.
We also hold gold, commodities and high-quality government bonds in our long term, strategic asset allocation, as we think they can cushion a variety of geopolitical and economic risks, and a hypothetical rise in uncertainty. We also hold ‘insurance’ instruments for the US and Europe (where client knowledge and experience, and regulations and investment guidelines, permit), which can appreciate when equity markets decline. Conversely, if we were to detect lower uncertainty ahead, or a more positive path for, say, US equities, we might consider selling those instruments.
In terms of currencies, recent dynamics have been mixed. This morning, the US dollar strengthened further against the euro to 1.076, the lowest since July. We’ve already seen a stronger dollar recently, in part because the European Central Bank has reduced interest rates more than the US Federal Reserve (Fed). Conversely, the pound sterling hasn’t weakened that much relative to the dollar, only depreciating slightly in recent weeks. This is because the Bank of England (BoE) has so far refrained from cutting rates as swiftly as other central banks. This Thursday, we expect both the Fed and the BoE to lower their key policy rates by a quarter-percent.
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