Summary:
The markets partially anticipated a Trump return to the White House. The initial price action in equities strongly favored U.S. small caps due to anticipated regulatory relief from a second Trump administration. The bond market continued to sell off as investors bid up yields to account for a more accommodative fiscal policy and likely return of tariffs in some form. WMS’ client portfolios are reasonably positioned to benefit from the market’s response; however, we continue to emphasize strategic, long-term asset allocation over tactical asset allocation.
Market Reaction
- Donald Trump has the requisite 270 votes to win the Presidential Election. It remains to be seen what the final vote count is, but he appears to be on his way to winning over 300 electoral votes as well as the popular vote. The GOP has retaken the Senate with at least 52 seats pending the outcome of several battleground states (MI, WI, PA). The GOP flipped OH, MT and WV and lost zero Senate seats. It’s too early to call the House race, but it appears the GOP will win the House by a narrower margin than they had going into the election.
- We believe markets were starting to price in a Trump win, but in the short-run, small cap stocks are likely to benefit from a longer runway of corporate tax relief, while mega-cap tech will be expected to face a reduced regulatory burden in 2025 and beyond. The Russell 2000 (small cap index) is up around 5% today and outperforming the large cap S&P 500 by roughly 300 bps. Long-term rates shot up due to the expectation of more deficit spending and/or tax cuts that may spur inflation and cause the Fed to reduce interest rates more cautiously.
- The immediate takeaway is long domestic equities and short duration (bonds). Small cap stocks and potentially energy, commodity, and financial stocks are likely to benefit on the margin. While the dollar will likely receive a short-term boost, the longer-term outlook for international stocks is mixed; inflation is bearish for the dollar but trade policy may tilt the playing field further against non-U.S. companies.
- We expect the Trump victory will be read as a positive for domestic manufacturing, but there is already a lot of stimulus in the system and it appeared that the capital spending cycle was poised to turn in 2025.
Economic Outlook
- Much of Trump’s pre-election rhetoric had an inflationary bias. Trump has emphasized tariffs as a source of revenue, as well as other trade and immigration policies that may increase consumer prices. It remains to be seen how broad-based tariffs will be under a Trump administration. In his first administration, Trump used tariffs that were targeted at specific industries. The White House has wide latitude to introduce tariffs and trade restrictions, but rhetoric aimed at our trading partners may be toned down in future rounds of negotiation.
- Trump has stated that he would likely allow Fed Chair Powell to complete his term but expects to replace Powell with a new Chair when his term is over. This dynamic creates uncertainty over the direction of short-term interest rates, and questions of Fed independence will also impact the long end of the curve. If inflation expectations raise, the Fed’s current cutting posture could be in jeopardy.
Taxes
- The GOP can use reconciliation to extend tax cuts from 2017 and further reduce the corporate tax rate in 2025. Both were a stated priority of Trump during the campaign. The estate tax exemption, which is set to sunset at end of 2025 by Congressional authority, will be under the microscope. Trump may be able to extend the estate exemption through the reconciliation process and avoid a filibuster in the Senate.
Big Picture
- We believe our client portfolios (both public and private) are currently well positioned for the market’s reaction to the election results. On the public equity side, our factor-based approach has a value and size (smaller) bias. Our fixed income portfolios have a duration of about half of the benchmark. Our emphasis on the lower middle market should benefit from higher domestic spending and is less reliant on leverage and thus interest rates.
- Much of the anxiety produced by this contest centered around social issues, ideological principles, and tone. While important, we don’t believe these issues have first-order impact on markets and portfolios.
- Short-term and long-term implications of a Trump presidency are hard to gauge and may even run in different directions. Though our portfolios (and the markets generally) were set up for a Trump victory, the long-run outcomes are very much unknown. This is why we must always be careful when seeking any tactical advantage in portfolio positioning. Our greatest strength is our disciplined, long-term orientation of investing through cycles and across administrations.
- Both presidential candidates emphasized rhetoric over economic substance. The real rubber of economic policy will hit the road when Trump’s economic appointees are announced and when Congress votes on a budget. Hence much of the market movement over the next month or two will be speculative. Gary Cohn and Steve Mnuchin’s economic recommendations are much more predictable to markets than Peter Navarro’s or Elon Musk’s. Strategic asset allocation between stocks and bonds, U.S. and international, large and small will need to be informed by actual policy, not campaign promises.