US Elections

As the US economy and policy can have a large influence on the investment environment, the outcomes of the US elections held on 5 November were seen as potentially significant for investment markets. Leading up to the day of the elections, most commentators expected a tight race, with betting markets favouring Donald Trump being elected president.

Outcomes of the Elections

The outcomes of the elections were known relatively quickly and were in favour of the Republican party, with Trump securing the presidency. At the time of writing, it seems likely that the Republicans also gained control of both the House of Representatives and the Senate, which would provide considerable power to implement their polices. This is a very important development.

While a range of factors influenced the US elections, the impact of high inflation over recent years likely played a crucial role. Over this period, inflation has generally risen at a faster pace than wages, so households spending power has diminished. This has been a common theme in most developed world economies and largely reflects very stimulatory policy being applied to supply constrained economies during the early phase of the pandemic.

Investment Market Reaction

Trump is expected to be pro-growth and pro-business. Reflecting this, there were large moves in investment markets on the day after the US elections were held. The US S&P 500 rose by 2.5% and the US 10-year bond yield rose by 0.15%. The US dollar also rose sharply. The moves in other equity markets were more subdued. For example, the ASX 200 increased by 0.8%. In Europe and Asia, some stock markets declined due to concerns over potential trade tariffs.

Policies

While the actual policies that will be implemented under the new administration are uncertain, the general expectation is that they will result in more growth and inflation. Key likely aspects of the policy changes are: materially higher tariffs; tax cuts; reduced government spending; and less regulation.

Chart 2 shows that the US budget deficit as a percentage of GDP in 2023 was high at around 6%. Under the new administration, it is expected to remain very high and possibly rise in the coming years. This is primarily due to the likely extension and modification of the Tax Cuts and Jobs Act, along with tax exemptions. The main source of revenue growth in Trump’s plan would come from increased tariffs, particularly in relation to China.

Investment Outlook

The current US macroeconomic environment is markedly different from when Trump was first elected in 2016, with the labour market now close to full employment, the Federal budget deficit and debt levels significantly higher, and US equity valuations and bond yields also more elevated. Stimulatory fiscal policy in this environment is likely to result in increased US growth and higher inflation pressures (with a lag), leading to higher long-term interest rates and a greater chance of inflation triggering a recession within the next few years. Additionally, higher tariffs are expected to negatively impact global growth and drive-up prices, with China and Mexico likely to be particularly affected. At this stage, the impact of Trump on how the US Federal Reserve will operate is unclear. This could have important implications for the investment environment.