US Election: What does it mean?

As I write, Donald Trump has been declared the next President of the United States. It even looks like he will win the popular vote. The Republican party also looks to have gained a majority in the Senate (Upper House). The fate of the House of Representatives remains unclear.

Our job is not to be political commentators, it is to manage your investments. Any time we communicate with you, it should be in relation to the prospects for those investments. This letter is very much to reassure you that we do not position portfolios to benefit from the outcome of a binary event that was perceived as being a 50:50 coin flip. In addition, the truth is that elections are very rarely consequential for the prospects of well diversified, multi-asset portfolios. There are many reasons for this:

• Electoral terms are short (in the US only 4 years). Stock markets discount cash flows over much longer time horizons.
• No one knows what politicians will be able to do, let alone what they will actually do, once in office.
• Rhetoric in campaigns does not always translate into action once elected. Some think Trump’s posturing regarding tariffs may even have been a tactic to strengthen his hand once in office, and he has no intention of raising tariffs by anything like he has indicated.
• There is often not much difference (when it comes to those policy areas important for financial assets) between political parties in Western democracies.
• Polls are becoming increasingly poor at predicting electoral outcomes. The most sophisticated pollsters thought the outcome was essentially a coin flip . The reality is an outcome far from close. This means that financial markets have not been able to “price in” the Trump victory, but now it is upon us, they will do so very quickly. We are not in the business of positioning portfolios to benefit from unpredictable one day moves.

The initial reaction from US markets is not a surprise. US futures markets are strongly higher – with large cap US equities predicted to open c. 2% higher and smaller companies up c. 5%. The dollar is also strong versus sterling (up over 1%), and US bond yields are higher. UK equities have opened up strongly in sympathy, with businesses that have large US exposure leading the risers. Importantly, the election has removed a significant amount of uncertainty. For UK investors, this comes hot on the heels of the Budget, and so many may now feel comfortable putting money back to work.

Strength in US markets is predicated on the expectation that Trump will lower corporate taxes, increase tariffs, be less fiscally responsible and pursue less of a “green” agenda. All of which is, at first glance, in favour of domestically-focussed US companies – hence the strength this morning in futures markets of US smaller companies’ equities.

However, the moves this morning represent just the initial reaction. Experience with previous singular events has taught us this does not necessarily dictate what will happen over the coming days, never mind years. Investors may decide to focus on the risks inherent in Trump’s policy agenda, sending markets in another direction. Some economic commentators predict higher inflation (which might result in fewer cuts in interest rates from the Federal Reserve), and lower longer-term US economic growth (as a result of tighter immigration and supply-impairing tariffs). Indeed, some others point to the risks of investors losing confidence in the ability of the US economy to sustain a weak fiscal position under a Trump presidency.

At present, with equity markets and the dollar up this morning, and bond yields only marginally higher, it looks like investors are giving Trump the benefit of the doubt for now. But as sure as the world will keep turning, investors will soon move on, and there will be other uncertain events for them to mull over.

Many predict that Trump in the White House will embolden other autocrats, increasing geopolitical risk. Does this increase the probability of China invading Taiwan? Does this spell the end of an independent Ukraine? What are the consequences for Moldova and Georgia and others? These are questions for geopolitical analysts, not investment managers.

All of the above does not mean we are complacent. Our job is to ensure your portfolios are able to weather macroeconomic, geopolitical and even cultural changes. We do this not just to increase the probability of a good night’s sleep for our clients. We do this because through a market cycle, disciplined diversification produces good investment outcomes.

Ben Conway – Chief Investment Officer

6th November 2024

IMPORTANT INFORMATION
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk)
with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS.

This is a Financial Promotion. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The information and opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested.