Election Results

In a surprising turn of events, Donald Trump has won the U.S. presidential election, defeating Kamala Harris. Just a month ago, Harris had a significant lead in the polls, but Trump managed to close the gap and ultimately secure the majority vote.

Key Trump Policies and Market Implications:

Trump’s victory has had a notable impact on the financial markets. The dollar surged, stocks reached record highs, and bond prices fell as expectations of tax cuts and tariffs on imports fuelled optimism about economic growth and concerns about inflation. The S&P 500 index rose by 2.51% to a record high, with significant gains in small-cap stocks and banks, which are expected to benefit from Trump’s anticipated lighter regulatory approach. The dollar reached its highest level in over four months, Bitcoin hit record highs, and Treasuries were negatively affected.

Taxation

Trump plans to maintain the corporate tax rate at 21% and proposes reducing it to 20%, with a 15% rate for domestic profits.

Trade

Trump intends to increase protectionism with tariffs of 10-20% on all imports and 50-60% on goods from China. This could raise the average U.S. tariff rate on imports to around 17%, potentially boosting inflation and slowing economic growth due to reduced trade.

Immigration

Trump aims to significantly reduce immigration and deport undocumented individuals. This could slow population growth and impact various sectors, including housing and labor markets.

Federal Independence

Trump may seek to replace Jerome Powell and reduce the Federal Reserve’s independence, leading to a more interventionist approach to interest rates.

Climate Policy & Energy

Trump is likely to reverse the U.S.’s net zero commitments, support fossil fuels, and modify the Environmental Protection Agency’s EV standards and credits from the Inflation Reduction Act.

Regulation

Trump is expected to reduce energy and financial regulations and be more accommodating to tech mergers and acquisitions while continuing to regulate big tech.

Defense

Trump plans to reduce or end support for Ukraine, encourage increased military spending by Western Europe and other allies, and potentially reduce U.S. defense commitments overseas.

Budget Deficit

The budget deficit, already at 6.5% of GDP, could increase by 2-3 percentage points under Trump.

Political Market Impacts

Interest Rates: Upward pressure on U.S. bond yields due to increased budget deficits, higher inflation, and a less dovish Federal Reserve.

U.S. Equities: Short-term boost from tax cuts and deregulation, but potential long-term negative impact from trade wars and higher bond yields.

Currency: Upward pressure on the U.S. dollar due to higher tariffs, interest rates, and global uncertainty.

Cryptocurrencies: Increased interest in Bitcoin and other cryptocurrencies, as Trump is perceived as more favourable towards the sector.

Impact on Australia

Trump’s trade policies may have a limited direct impact on Australia, as exports to the U.S. account for only 4% of Australia’s total exports. However, the larger tariffs on China, Australia’s largest trading partner, could have indirect effects. Many of Trump’s policies could lead to a rise in global inflation.

Historically, U.S. shares have performed slightly better under Democrat presidents, with an average return of around 9.5% per annum since 1928, compared to 9% per annum under Republican presidents when one party controls the House of Representatives, the Senate, and the White House. This drops significantly with a divided government. A Republican sweep could be positive for markets, but if Republicans lose control of the House, Trump may struggle to cut taxes, leading to less upward pressure on bond yields but potentially negative effects on shares due to tariff hikes.

Final Note

As we await the final results for the Senate and the House of Representatives, it’s important to note that corporate tax rates, regulation, and the fiscal deficit require agreement from both the president and Congress. In contrast, the president has more flexibility on tariffs and immigration policies.

While some of these policies may impact investment markets, it’s crucial for investors to remain focused on their financial objectives. Ensuring that portfolios are well-diversified across asset classes and geographies and maintaining a long-term perspective will help mitigate the effects of market volatility. Sticking to your investment beliefs and philosophy will help you achieve your financial goals despite the noise from the election results.