To be re-elected as President of the US, after having lost an election, is a very rare event. In fact , Donald Trump will be only the second person to have ever achieved it. And the previous time this happened was in the late 1800s, when the first Democrat to win after the civil war, Grover Cleveland became the 22nd and the 24th President. This rare accomplishment and the fact that he also won the popular vote (ie more votes than the oppenent, unlike 2016) prepare the ground for a strong presidency with a willingness to put his personal stamp on many issues : economic, geopolitical, social to name the most important. The red sweep (both House and Senate going to the Republicans) sets up the ground for Trump 2.0.
Global financial markets reacted exactly as we had expected. US bonds sold-off and US equities had their best week this year, with 5% gains for the main indices and a 9% jump for small caps. European indices dropped by 1.5% on average, as they are heavily exposed to companies that will be hit with tariffs. The equity prices of the corresponding companies (primarily beverages, luxury, autos) had already corrected a lot in anticipation of a possible Trump win, but the selling pressure by short-term traders and speculators did not find enough bottom buyers. Chinese markets had a positive week, despite the threat for more tariffs as the local investors keep buying, but it is going to be volatile.
Mr. Trump is not the typical politician who is elected with promises only to forget most of them soon after. It is a mistake to assume that his extreme positioning on tariffs and on immigration are just words. Already, the name that is reportedly going to be the US Trade Representative is Mr. Lighthizer, who served in the same role during the first Trump presidency and who is considered the mastermind of tariffs. It would be wrong to bet on Trump listening to his advisors or to economists, who are already providing gloomy forecasts on global growth and inflation if the totality of his agenda is implemented. The only way for him to walk away would be if the US markets revolt with a major correction. Just the threat of a possible correction will simply not do the job.
We dare to say that betting for a 2017-2019 copy-paste reaction of financial markets, because Trump is again president could be wrong. Financial and geopolitical conditions are now significantly different. As a starter, the US government debt to GDP was 105% in 2016 and it is growing to over 120% now. The US government budget had a (rare) surplus back then and it runs an almost 7% deficit now, the highest outside a war period. Inflation was not an issue, running close to 1.7% at the time of Trump's first election and it is 2.4% now with the FED struggling to bring it below 2%. The world was rather peaceful, but now we have two major military conflicts consuming the daily news. Finally and most importantly, the S&P500 was trading at just 16 times earnings when the 2017 rally started and now it is already at 22 times forward earnings, much higher than its long-term average. Make no mistake. US markets can indeed rally a further 20% in 2025, into bubble levels. But that would be just that, a bubble. And then we all know what happens.
Perhaps the most worrying aspect of a Trump presidency is his genuine dislike of the FED's independence. Ideally he would like to be the person setting the level of interest rates that suits his government's policy. And to get a (scary) glimpse of what can happen, we should note that earlier this year, Trump floated the idea of nominating a shadow chair of the Federal Reserve, who would not sit on the bank’s policymaking committee but would give guidance on the future direction of monetary policy... Again, markets were quick to dismiss this crazy idea, but as mentioned above Mr. Trump does not just "float ideas", he really believes that he should intervene in the FED's decision, much like some populist regimes do in the third world.
Speaking of the FED, it lowered rates by 25bp to 4.75%, as expected. The poor Mr. Powell, during the press conference, had to reply to questions of what he would do if Mr. Trump asked him to resign, to which of course he answered with an emphatic NO. And when asked if he can be fired he said "I cannot be removed, by law". With respect to the monetary policy, the FED sent the clear message that they are paying a lot of attention to the labor market, feeling more confident on the inflation's path ahead, despite its expected rise in the coming two or three months. He avoided confirming that the FED will certainly cut rates again in December, simply saying that "it is an option to consider".
We have mentioned a few times that fiscal deficits in the US and Europe could play an important role next year. Already, the German coalition government has become the victim of it. Chancellor Scholz fired his finance minister, Mr. Lindner and the reason was disagreements on the 2025 budget, and in particular how deep the cuts on spending would have to be to adhere to the national debt brake, that Germany has established in its constitution. In his statement, Chancellor Scholz noted his preference to deactivate the debt brake by triggering the so-called "escape clause" in view of the geopolitical uncertainty and specifically the war in Ukraine. To do so, however, requires a parliamentary majority which, given the breakdown of the coalition, is now missing. The end result it that snap elections for a new government are scheduled as soon as the first quarter of 2025, if the budget cannot be passed and a vote of confidence is not given.
Bonds had a volatile week, but finally found buyers as the US yields exploded higher. The immediate reaction to the Trump landslide win was the 10-year US yield to reach a multi-month high of 4.50%, which momentarily put a lid on the equity market enthusiasm. But on the days that followed buyers took the yield down as much as 20bp (to 4.30%), the equity market heaved a sigh of relief and continued higher. In Europe yields initially fell (!), then rose sharply higher, only to finish the week down again, as buyers stepped in. The German 10-year yield fell back below 2.40% and are very interesting leves to buy.
Chart of the Week : The US is running the largest primariy budget deficit among the developed world.
A very interesting chart by Apollo Management shows the primariy fiscal deficits of a sample of developed countries. Attention, we are talking about the primary budget , which excludes the interest payments on government debt. Interestingly we see that the European south has managed to "clean-up" their 2010-2012 mess and are running primary surpluses or small deficits (Spain). The US spending spree of 2022-2023 had led to a 6% deficit which moves to 7% if we include the interest payments on the balooning debt. Equity investors and traders have chosen to ignore this. We can also chose to ignore this and continue our (investing) life because "Trump will fix it", which is his main campaign motto. To be clear, we have not made any decisions yet to change our investment strategy in any direction (reduce or increase risk). We are simply watching the Trump 2.0 update downloading for now.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week :Apollo Management , Photo: Wall Street Journal
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