US Election – What Trump Means for Markets

The 2024 U.S. Presidential Election resulting in Donald Trump being elected as the 47th President of the United States, marking a historic achievement with Republicans winning the swing states and even the popular vote, a feat unseen since Reagan’s landslide in 1984. This win has sent waves across global markets, sparking a range of reactions. Investors, analysts, and policymakers are now watching closely as Trump’s return to the White House hints at potential shifts in economic policy, trade relations, and corporate America’s operating landscape.

Here’s a breakdown of what Trump’s presidency could mean for global markets and how Australia, with its close trade ties to the U.S. and China, might navigate the expected changes.

Immediate Market Reactions to Trump’s Victory

Financial markets have been quick to respond to Trump’s win, with a clear initial trend: rallying equities and a strong dollar. On the first day of trading post-election, large-cap equities like the S&P 500, Dow Jones, and NASDAQ surged by 2-4%. Small-cap stocks, measured by the Russell 2000, climbed even higher, close to 6%. These rallies signal a positive investor sentiment around Trump’s anticipated pro-business policies, which include corporate tax cuts and deregulation.

Beyond U.S. equities, global currencies also moved. The U.S. dollar strengthened in the wake of Trump’s victory, reflecting a boost in investor confidence toward the greenback. Bitcoin hit record highs as well, driven by expectations of Trump’s deregulation-friendly stance and openness toward cryptocurrencies. On the other hand, European stocks experienced a slight dip, largely due to concerns over Trump’s trade policies, which could put the EU under strain and reduce the bloc’s economic growth.

These initial reactions reflect the dual nature of Trump’s policies: potential benefits for U.S.-focused companies and sectors, but caution for those exposed to global supply chains and foreign markets, especially Europe and Asia.

Rising Bond Yields and Inflation Risks

One of the major economic impacts we expect from Trump’s presidency is rising bond yields and a strengthening U.S. dollar. Trump’s ambitious spending plans could lead to deficits of up to $15 trillion over the next decade, which would likely place upward pressure on bond yields as investors demand higher returns on U.S. debt. This is already apparent in the U.S. 10-year yield, which has risen to nearly 4.5%, up significantly from the 3.6% lows seen just a few months ago.

The bond market, known for its ability to anticipate economic shifts, is bracing for increased government borrowing to fund Trump’s policies. If deficits rise as projected, we may see bond yields pushed even higher, demanding higher risk premiums. For investors, this signals potential turbulence in bond markets and could mean keeping a cautious approach on long-duration U.S. bonds.

Alongside rising bond yields, there is an elevated risk of inflation. Trump’s economic plans, including potential deportations, tariffs, and significant government spending, are likely to drive inflation. This inflationary pressure could result in the Federal Reserve maintaining higher interest rates longer than initially anticipated. For consumers, this could mean higher borrowing costs, which may dampen spending and affect sectors reliant on consumer financing.

Opportunities and Risks in the Equity Markets

Trump’s re-election brings a range of opportunities and challenges for equity markets. On the positive side, his focus on corporate tax cuts and deregulation should provide a tailwind for U.S. companies, particularly those in sectors like energy and manufacturing. These industries, already buoyed by Trump’s support for traditional energy production, may see increased earnings potential under his administration. The expected tax cuts could also free up capital for companies to invest in innovation, expansion, and hiring, potentially boosting productivity and economic growth.

However, Trump’s presidency also presents risks, particularly for sectors with significant leverage, such as real estate and infrastructure. These sectors are more sensitive to interest rate increases, and the inflationary pressures from Trump’s spending plans could lead to higher rates. Highly indebted companies could face rising costs of capital, which may impact their bottom lines. This risk reinforces the importance of selective investing, favouring sectors less exposed to interest rate fluctuations.

The Return of Trade Tensions

One of the hallmarks of Trump’s first term was his focus on trade imbalances and his “America First” approach, and this term is likely to see a similar stance. Trump’s proposed tariffs on Chinese imports could reignite trade tensions, putting pressure on global supply chains and increasing costs for imported goods. Such tariffs would likely have inflationary effects, driving prices higher in the U.S. and potentially slowing economic growth in China, Europe, and other regions reliant on global trade.

Europe, which has faced slower economic growth in recent years, may be particularly vulnerable to any tariffs that Trump imposes. A reduction in economic growth could weaken the euro and lead to economic challenges for larger Eurozone nations, such as Germany, France, and Italy. Moreover, a slowdown in trade with China would have ripple effects globally, potentially softening demand for raw materials, machinery, and industrial goods that fuel global growth.

Implications for Australia: Exports, Investments, and Economic Policy

As a major trading partner of both the U.S. and China, Australia could face challenges under Trump’s protectionist policies. Trump’s tariffs on Chinese goods, for example, could slow China’s growth, indirectly affecting Australia’s economy. China is Australia’s largest trading partner, and any weakness in China’s economy could reduce demand for Australian exports, especially minerals and agricultural products.

For Australian companies with U.S. exposure, however, the outlook may be brighter. Firms like BlueScope Steel, Worley, and Computershare have already seen share price gains as investors anticipate a strong U.S. economy and a favourable business climate under Trump. A robust U.S. economy and a stronger dollar could benefit Australian firms that sell products or have business operations in the U.S.

Another consideration for Australia is corporate tax reform. Trump’s corporate tax cuts could put pressure on Australia’s current 30% corporate tax rate, as Australian businesses and policymakers face increased calls for a more competitive tax environment. The Albanese government may need to weigh the need for tax reform to maintain Australia’s competitiveness and attract global investment.

Inflation and Interest Rates: Global Ripples from U.S. Policies

One of the biggest risks with Trump’s presidency is the potential for higher inflation, which could have global implications. As the U.S. government increases spending, the risk of budget deficits grows, putting upward pressure on inflation and, by extension, interest rates. For Australian companies, this could lead to rising borrowing costs if global interest rates follow U.S. trends.

Australia’s Reserve Bank (RBA) may be forced to respond if global inflation trends lead to higher rates. While current projections do not expect an RBA rate cut until mid-2025, rising inflationary pressure from U.S. policies could impact Australia’s interest rate outlook. A more cautious borrowing environment might affect heavily indebted Australian companies, reinforcing the need for a balanced approach in selecting equities.

Energy Policy and Renewable Investments

Trump’s focus on energy security and traditional energy sources like oil and gas may reduce emphasis on renewable energy initiatives in the U.S. Australia may need to reassess its energy investment strategy, considering the potential shift in the global energy landscape. As the U.S. reduces renewable investments, there could be more space for Australia to lead in renewable sectors such as hydrogen and battery storage. However, Australian policymakers will need to weigh the risks of aligning too closely with global energy trends that may be subject to frequent political changes.

Navigating Global Volatility and Strategic Investments

Trump’s trade strategy is likely to bring increased volatility to global markets, yet it could also create opportunities. Sectors like Australian agriculture, which aligns with U.S. import needs, could benefit from shifts in trade patterns. Likewise, Australian raw material exporters might find new demand as the U.S. adjusts its trade relationships. For Australian investors, this volatility offers both opportunities and risks, reinforcing the need for a diversified portfolio with exposure to growth sectors less reliant on debt.

Conclusion

Trump’s second term brings both challenges and opportunities for investors, businesses, and governments around the world. For Australian investors, a balanced approach is essential—one that taps into growth sectors while remaining cautious about inflationary pressures and potential interest rate hikes. As Trump’s policies unfold, markets will continue to react, and investors who stay informed and agile may be well-positioned to capitalise on emerging trends.

From potential corporate tax changes to shifts in energy policy and trade dynamics, Trump’s return to office will impact global markets in multifaceted ways. For those with exposure to both U.S. and Australian markets, keeping an eye on policy developments and economic indicators will be crucial for navigating the path forward. In this environment, adaptability and strategic planning will be key to making the most of both the risks and opportunities ahead.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

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General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.