Weekly comment: Stocks rally as Trump wins US election

4 minute read

Weekly podcast – Market overview

This week’s host, Investment Manager, Andrew Cartwright, discusses the past week as Donald Trump returns for a second term as US president, with Richard Carter, Head of Fixed Interest Research and Amisha Chohan, Head of Small Cap Strategy. Among the topics discussed, US bond market, UK rate cuts and much more.

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Market overview – Richard Carter, Head of Fixed Interest Research

Last week, the MSCI All Country World Index (MSCI ACWI) rose by 3.4%, bringing its year-to-date gain to 20.8%. This positive performance was largely a result of the US election, with Trump winning the presidency and the Republicans the Senate meaning a victory in the House of Representatives would deliver a “red sweep”, paving the way for lower corporate taxes, looser regulations and higher corporate earnings.

United States

The US election overshadowed a busy week in US economics, as Donald Trump became only the second president to return for a second non-consecutive term. Investors were optimistic about the outcome as US stocks posted their best weekly gain in a year (4.7%, 27.2% YTD). Technology (5.8%, 29.3% YTD) and small-cap (8.6%, 19.7% YTD) stocks outperformed, with the latter seen as particularly benefitting from Trump’s “America first” agenda.

Tesla experienced a particularly significant boost, with its market value soaring above $1 trillion for the first time in more than two years. The stock was up 8.2% on the day, as bets that Tesla owner Elon Musk’s closeness to the incoming president would support the electric vehicle maker’s fortunes.

Here's a sector-by-sector breakdown to the US Election.

In the same week, the Federal Reserve (Fed) announced a 25-basis-point (bp) cut in the federal funds rate, its first easing since mid-September. Speaking on the decision, Fed Chair Jerome Powell emphasised that future fiscal policy changes would be evaluated as they were announced, maintaining a cautious stance.

United Kingdom

Last week, the Bank of England (BoE) reduced the base rate by 25bp to 4.75%, following an 8-1 vote from the Monetary Policy Committee. This decision marks the second rate cut by the BoE this year, as it seeks to loosen monetary policy to support economic growth amid a slowing inflationary environment.

Reacting to the decision, BoE Governor Andrew Bailey indicated that further gradual rate cuts are likely if the economy evolves as expected. The BoE’s forward guidance suggests that further rate cuts could be implemented gradually, depending on economic developments.

Reacting to the news, large caps lost 1.1% (7.9% YTD), while mid-caps gained 0.2% (7.2% YTD), as lower borrowing costs are expected to benefit smaller companies with higher growth potential. The British pound remained stable against the US dollar, ending the week at US$1.29.

Europe Excluding the UK

In Europe, concerns about US trade policies under President-elect Donald Trump weighed on markets. The MSCI Europe ex UK index ended the week down 1.0% (7.0% YTD), while major stock indexes in Germany (-0.2%, 14.7% YTD), France (-1.0, 0.2% YTD), and Switzerland (-1.4, 9.4% YTD) saw declines. The euro depreciated against the US dollar, ending the week at US$1.07.

US Bond Market

A closely watched bond market indicator is pointing to rising price pressures in the US, in anticipation of policies from president-elect Donald Trump that are seen as likely to fuel inflation.

So-called break-evens on US sovereign debt — a proxy for investors’ inflation expectations — have risen steadily in recent weeks, prompted by economic data pointing to stickier-than-expected price pressures and Trump’s rising electoral chances.

The two-year break-even — the gap between yields on Treasury bonds and inflation-linked bonds, — has moved up by 100bp since September to 2.6%. The rate increased as markets began to price in a potential Trump presidency and then jumped following his emphatic victory.

However, other investors have questioned whether market expectations of inflation have been overdone, if Trump’s campaign rhetoric on tariffs and taxes is not matched by his actions in office. Federal Reserve Chair Jerome Powell indicated on Thursday that he was not yet concerned about the shift in inflation expectations, saying they were broadly consistent with its 2% inflation target.