Fund managers explain what Trump victory means for US markets

Fund managers have been offering their take on what the outcome of the US election means for financial markets.

Below, we run through how fund managers are expecting equity and bond markets to respond to Donald Trump returning as the new leader in the White House.

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Bond market reaction

Let’s start with bonds, due to the fact that this asset class has been experiencing a pick-up in volatility since it became clear that Trump was on the verge of victory.

Both bond and equity markets have also been moving to reflect the possibility of a Republican sweep. If the party controls the House, Senate and White House it will be easier for policies to get the green light.

The US bond market is seeing bond prices fall and yields rise, with 10-year Treasury yields around 4.4% compared to 4.15% yesterday evening.  

Stephen Dover, chief market strategist and head of Franklin Templeton Institute, says: “Bond investors are reacting to the probability that tax cuts will not be accompanied by significant spending restraint.” In other words, the value of US government borrowing will rise.

Mitch Reznick, group head of fixed income at Federated Hermes, notes that US bond yields have risen to reflect “an administration that is perhaps relatively more deficit-agnostic than the alternative”.

He adds: “As deficit relative to GDP in the US increases, the cost to borrow rises, hence the widening.”

In addition, the bond market is also moving to price in stronger growth and, with it, possibly higher inflation. Dover adds: “That combination could slow or even halt anticipated Federal Reserve rate cuts.”

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Thys Louw, emerging market fixed income portfolio manager at Ninety One, says the initial market reaction of higher Treasury yields “reveals the expected policy mix to comprise more expansionary US fiscal policy, reduced government regulation, a change in geopolitical stance, and increasingly aggressive trade policy towards global manufacturing centres such as Europe and Asia”.

Meanwhile, the US dollar is advancing on foreign exchange markets, a reflection of investors positioning for possibly higher inflation, which could also be driven up by Trump’s policy promise to increase tariffs. Such a move could see companies look to pass on costs through price increases.

Isabel Albarran, investment officer at Close Brothers Asset Management, expects higher inflation. She says: “Over the long term, if Trump delivers on his pre-election rhetoric, we expect his term to be more inflationary than a Harris administration, with tariff plans, tighter immigration controls and tax cuts all potential sources of inflationary pressure.”

However, she still expects the Federal Reserve to deliver a quarter-point interest rate cut tomorrow, from the current range of 4.75% to 5%, adding that “the pace of further easing may be more moderate”.

Equity market reaction

In contrast, ahead of today’s opening bell on Wall Street, US equity futures markets are responding favourably to a Trump presidency.

Franklin Templeton’s Dover says: “US equity futures markets are responding favourably to the probability of a Trump presidency and a possible ‘clean sweep’. US equity futures have risen over 1%, with a larger gain from the broader Russell 2000 futures index.”

On the back of expectations that corporate tax rates will fall, Dover says: “The biggest winners will be sectors and industries welcoming a more business-friendly regulatory environment.”

Among the areas Dover expects to benefit the most are fossil-fuel energy companies, financial services, and smaller-sized companies.

John Plassard, senior investment specialist at Mirabaud Group, says a Trump victory “promises to be a real boost for US markets”.

He adds that Trump’s ‘America First’ policy will revive the energy, defence and manufacturing sectors, in turn boosting domestic investment.

“In short, Donald Trump’s return promises a revitalised US economy, but at the cost of strained geopolitical stability and a record (US) deficit,” says Plassard.

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Zehrid Osmani, manager of the Martin Currie Global Portfolio Ord (LSE:MNP) Trust, says “markets will be most impacted by monetary policy expectations”.

He adds: “The market is likely to focus on corporate tax rate cuts pledged by Trump, as well as intentions on tariffs, as these could fuel a more inflationary trend, which would lead to a more hawkish monetary policy response by the Federal Reserve.”

On the prospect of higher inflation, Osmani says: “A Trump presidency could lead to a more inflationary environment, but one potentially more supportive to corporate profits and earnings growth from lower taxes.”

Richard de Lisle, manager of VT De Lisle America, says Trump’s measures are “expected to be better for the stock market than for the bond market because of his liberalism”.

De Lisle says: “It is estimated that Trump’s economic plans would add a cumulative $7.8 trillion to the national debt over his term, as he cuts taxes and increases deficit spending. Such measures are likely to maintain current government infrastructure spending plans, sustain consumption and keep the US economy strong. Combined with his fierce threats of tariffs, these measures should benefit domestically focused manufacturers and industrials.

“Trump is also likely to break with presidential impartiality and proactively encourage the Fed to press ahead with interest rate cuts despite big spending plans. This combination could keep the economy going, while stoking slightly higher inflation, which would be good for commodity-related companies that can pass on their costs.

“Finally, Trump’s rhetoric around both protectionism and de-regulation will be positive for smaller companies that have more US revenue exposure and that are advantaged by reduced regulatory burdens, allowing them to grow faster.” 

Gervais Williams, head of equities at Premier Miton Investors, was more cautious, predicting that “US equities will peak out.” 

He said: “Given the Trump win today, I now expect the change in stock market trends to accelerate. Specifically, it looks like Trump will have a clean sweep, so he won’t have to contend with many checks and balances. The bottom line is that he will spend, it will lead to more costly government debt, and inflation.

“This will end up constraining the rise of the US stock market. Alongside, it will enhance the advantage of generating surplus cash flow, and thereby lead to the UK stock market outperforming by a larger quantum than before.”

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Play the long game

As ever, it is key to stick to your long-term investment strategy rather than making knee-jerk reactions.

Mirabaud Group’s Plassard notes election results have little impact on long-term investment returns.

Plassard says: “Despite the alarmist rhetoric surrounding presidential campaigns, financial markets tend to perform well, regardless of which party is in power.

“To illustrate this, since 1950, the S&P 500 has generated a cumulative return of 359,416% (with dividends reinvested), covering 14 presidents, including seven Republicans and seven Democrats. In other words, a $1,000 investment in the S&P 500 in January 1950, with dividends reinvested, would be worth around $3,594,160 today.

“This figure shows that investors should not base their strategies on election results, but rather take a long-term view.”