The comprehensive victory of Donald Trump in the 2024 US presidential election can be expected to have far-reaching implications for global financial markets and economies. While we don’t have a crystal ball, here are ten key ideas that could play out.

In the near term, the stock market may enjoy a rally, particularly if the Fed continues to cut rates and guides for further policy easing. However, we believe that interest rate reductions in 2025 may disappoint investors if Trump is able to enact his policy proposals quickly and effectively, as touted throughout the recent presidential campaign.

1. Removal of uncertainty: Equity markets can become increasingly volatile when important outcomes hang in the balance. A decisive victory is likely to be initially well received by equity markets as it reduces inherent uncertainty around the outcome and the possibility of disruptive behaviour.
2. Investor fears likely to dissipate: Investors were not likely to panic, regardless of this election outcome, as market volatility had already stepped high over the prior month. Given the high level of certainty around the outcome of a “Red Wave” (Republican victory in the presidential race, the House and the Senate), investors are able to more comfortably remove their hedges and deploy capital into risk assets such as equities. In response to the election result, equity volatility indicators are sharply lower.
3. Renewed inflationary pressures: A second Trump presidency has promised tax cuts and steeper import tariffs. If implemented, this could drive inflationary outcomes and prevent deeper cuts to interest rates by the US Federal Reserve (the Fed). Reduced trade flows could also negatively impact global shipping companies. We expect the Fed to cut rates by 0.25% in November and December. However, the likelihood of further easing in 2025 is less certain. In Australia, markets are now fully pricing the first rate cut to be in July, despite improving inflation data.
4. Labour market disruptions: Abruptly lower immigration and deportations could create labour force shortages and reignite wage growth, feeding into cost-push inflation. This would further pressure the Fed to hit the pause button in 2025, and along with the tax cuts and higher tariff proposals, risks igniting a late-1970s-type resurgence in inflation. It would also make it more difficult for nations such as Australia to cut the cash rate due to expanded interest rate differentials and the associated currency impacts.
5. Strong US dollar: The resultant structurally higher interest rate environment would usually expected to strengthen the US dollar. This has already commenced despite the Fed cutting rates by 0.5% in September. Trump 2.0 would likely raise the “neutral” interest rate (the rate which is neither contractionary or expansionary) and increase physical and financial capital flows into the US, often at the expense of emerging markets.
6. Higher government debt: The risk of rising government deficits and renewed price pressures have spooked global bond markets, where volatility is at twelve-month highs. By some estimates, Trump’s policy mix could add $7.75 trillion to the US national debt over 10 years. This has seen a significant sell-off in bond markets, pushing higher yields. Steeply higher bond yields are expected to impact borrowing costs for governments, consumers, and businesses.
7. Higher compensation for holding bonds over longer durations: So-called “term premiums” are rising in the US (and Australia). However, the prospect of higher trade barriers has seen to falls in near-term bond yields throughout developed European nations. This trans-Atlantic divergence in bond markets suggests that European investors are concerned that the ECB will need to make deeper cuts to official interest rates to respond to the potential disruptive impact of higher US import tariffs.
8. Sharemarket valuations could become more stretched: A key question is if equities (that are already trading at premium PE multiples) can withstand higher long-term yields (or “risk-free rates”) as these have negative impacts on company valuations. Markets have had a huge rally over two years. Any interruption to earnings growth could lead to significant correction, particularly if risk-free rates could not fall due to factors such as resurgent inflation.
9. Crypto strength: Cryptocurrencies have rallied strongly as Vice President Elect, JD Vance is seen as a champion of this space. Vance has demonstrated a strong pro-cryptocurrency position in his political career and has worked to pass pro-crypto legislation in Congress. Vance has also been critical of crypto tax reporting requirements in President Biden’s infrastructure bill.
10. Weaker oil prices: Oil prices could move lower if US producers choose to ramp up production and geopolitical tensions cool in Ukraine and the Middle East. Conversely, clean energy companies (many of which are based in Europe) might struggle under a Trump presidency if the new regime were to dismantle some of the infrastructure initiatives introduced by the Biden administration.

In summary, these are just some of the possible implications of a new Trump administration—and undoubtedly there will be many more (including a few curveballs for good measure). While investors need to remain alert to the changing macro and political landscape, this is not a time to panic. History and experience tell us that investors should look through partisan politics and continue to apply a disciplined and unemotional approach to the management of their investments.

As always, if you have any questions, feel free to book a chat with your adviser.

Thanks for reading.

—Pete