Trump’s Return: US Market and Macroeconomic Implications

In the wake of Donald Trump’s return to the US presidency, equity markets have responded positively, reflecting both optimism around anticipated economic and policy shifts his administration could bring, and relief from pre-election uncertainties. This initial reaction suggests that investors are betting on a pro-growth, protectionist stance, which could yield short-term gains in US equities, a stronger dollar, and robust performance in smaller sized companies. However, this optimistic trajectory comes with emerging risks, particularly in the areas of trade policy, fiscal sustainability, and the broader macroeconomic environment and shifting geopolitical landscape.

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Equity Markets Surge Amid Policy Optimism

The market’s positive response appears to stem largely from expectations of reduced regulation, extended individual tax cuts, and potential new corporate tax reductions. The S&P 500 saw a 2.5% gain in the days after the election, with strength in small-cap stocks, a segment set to benefit from Trump’s “America First” stance on trade and reduced reliance on global supply chains. Banking and insurance stocks also rallied on the prospect of a friendlier regulatory environment and potential Medicare payment increases. Technology firms like Tesla soared as much as 15%, anticipating tariffs on Chinese EV imports.

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Fixed Income: Rising Yields and Fiscal Deficit Concerns

Bond markets, however, are showing signs of caution. Investor concerns that a combination of tax cuts and increased spending could further inflate the fiscal deficit was reflected in the US 10-year treasury yield that rose significantly after Trump won the election. This is likely to complicate the Federal Reserve's path toward further rate cuts. The 30-year mortgage rate also climbed to 6.81%, highlighting market expectations of sustained inflation and pressure on long-term interest rates.

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Trade Policy and Inflation Risks

Trump’s return is likely to revive his aggressive trade policies. Speculation has already emerged around sweeping tariffs, including a potential 10% tariff on all imported goods and targeted tariffs of up to 60% on imports from China. Such moves could elevate inflation by making imports more expensive, prompting the Federal Reserve to reconsider its current interest rate trajectory, possibly pausing its current course on rate cuts if inflation climbs above comfort levels.

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Commodities, Energy, and Clean Energy Fallout

Energy stocks surged on expectations of a fossil-fuel-friendly administration, with oil and gas companies positioned to benefit from deregulation. In contrast, clean energy shares dropped sharply, anticipating potential reversals of Biden’s clean energy policies, including parts of the Inflation Reduction Act, which has supported renewable energy investments. Companies like Enphase and First Solar saw double-digit losses, while US steel stocks rallied on anticipated tariffs that would benefit domestic production.

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US Dollar Strength and Global Implications

The US dollar index rose 1.7% the day after the election as the prospect of US-centric growth and higher yields boosted demand for the currency. Emerging markets, particularly those with substantial export exposure to the US are vulnerable to the stronger dollar and trade barriers. Asian markets exhibited mixed reactions, with Japan’s Nikkei Index rising on stronger US demand expectations, while China’s markets softened on concerns of renewed tariffs.

Key Takeaways:

US Equities: Beneficiaries include small caps, banks, and non-renewable energy companies.

US Dollar: Strengthened by protectionist policies and higher yields.

Bonds: Anticipate upward pressure on yields; inflation-sensitive assets like commodities may benefit.

Global Impacts: Potential volatility in emerging markets and sectors exposed to US trade policies, especially clean energy and foreign automakers.

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Medium- to Long-Term Market Outlook

While the short-term market sentiment appears optimistic, the broader implications of Trump’s policies remain complex. The extended deficit and inflationary pressures could create a challenging environment for the US Federal Reserve, limiting its flexibility to cut rates. The technology sector, particularly companies with supply chains tied to China, could experience volatility if tariffs are enforced. History suggests that markets generally perform well under divided government, so the potential for a united Republican-controlled Congress will likely influence fiscal and economic policies going forward.

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Implications for New Zealand Markets and Economy

The equity market response from the NZX50 Index was fairly muted showing initial resilience. However, volatility may increase as market adjustments to US policies continue. New Zealand’s trade exposure to the US is significant, with exports to the US accounting for 13% of goods and 25% of services. If a Trump presidency results in persistent fiscal deficits and higher US long-term yields, there could be consequential upward pressure on New Zealand’s own government bond yields due to close ties with US Treasury rates.  

The New Zealand dollar may also face downward pressure as US dollar strengthening continues, potentially benefitting New Zealand’s exporters in terms of competitiveness, though this could be offset by possible tariff challenges.