By admin 
It was tight, most polls couldn’t split the candidates, uncertainty in the swing states meant both candidates had routes to 1600 Pennsylvania Avenue.
However, it is now clear that despite many commentators claiming President Trump had a ceiling on his vote share, he had collected votes and Vice President Harris had not increased President Biden’s share in 2020.
A popular vote victory now seems a certainty, as the Republican Party takes control of the Senate after gaining three seats.
The remaining question concerns the House of Representatives. President Trump needs their approval for changes on taxes and immigration. If this turns red, the Democrats will have limited political weight for the next two years.
A combination of clarity and President Trump’s proposals pushed markets higher.
The S&P 500 Index opened just under two percent higher, at an all-time high; the Russell 2000 Index rose four percent.
In the bond market, 10-year yields rose 20 basis points to almost 4.5 percent, although the Fed was still expected to cut rates by 25 basis points on November 7.
Banks are seen as the main beneficiaries of the policy agenda, with looser supervision expected, potentially leading to more mergers and acquisitions.
JPMorgan opened nine percent stronger, Goldman Sachs over ten percent, while the KBW Bank Index rose above eight, pulling the entire sector higher. Bank of Butterfield rose six percent in early trading.
Technology, which was the dominant sector until 2024, faced a more mixed response.
Of the Magnificent Seven, Tesla led the way, up 12 percent, reflecting the close relationship Elon Musk has had with the new president.
Alphabet responded slightly better than the market as a whole to the expectation that the Justice Department’s investigation into the split could be halted; However, Apple lagged behind because it is dependent on Asian imports for products that may be subject to import duties.
The Green Energy sector bore the brunt in early trading, expecting less favorable policies from the newly elected president that they are currently seeing under the Democratic administration.
Enphase Energy and First Solar both saw more than 14 percent negative movements.
Even the larger Nextera Energy lost nearly $10 billion in market capital. No policy has changed, but the Energy Select Sector’s increase of more than three percent gives a strong indication of what the market believes will be the difference in the coming policy.
It will take some time for the dust to settle on these initial reactions, but there are now important considerations for what the markets will do heading into 2025.
It is rare for midcaps to rise sharply while ten-year yields are also rising.
Smaller companies traditionally have more debt and are also more sensitive to interest rate movements. It’s clear from the rhetoric that President Trump is domestically focused, but this could be a mixed blessing for some domestic names.
Investments at higher interest rates can put pressure on smaller balance sheets and in a cyclical segment of the market, this can give the sector more leverage to help businesses thrive or fail.
This may lead to a more segmented market of winners and losers, i.e. opportunities in the sector that are undervalued, but they may carry greater risk as interest costs erode their cash generation.
Economic policy is the crucial segment that can determine the performance of the markets in 2025.
President Trump will try to set the continuation of his tax policies in stone and strengthen tax cuts for citizens.
The economic benefit from this will be weaker than before. This is just preserving the tax position rather than injecting more money into the economy.
The most critical market factor will be the imposition of tariffs and the response they generate.
Consumers are known to pay the ultimate price, but greater domestic production could bring benefits.
Tariffs were imposed on washing machines in 2018. Not only did the prices of imported machines rise, but domestic manufacturers also changed prices.
Even though no tariffs were imposed on clothes dryers, their prices rose; consumers normally purchase these items in pairs.
Jobs were created in the US as production shifted domestically; However, the economic impact of this did not outweigh the high costs for consumers.
If President Trump imposes tariffs, the US domestic economy will benefit in the medium term, but the initial impact will likely be inflation and the extent of that will depend on what companies go through.
Chairman Powell now has a conundrum; Near-term market data still points to the need to cut rates, but the previous expectation of more than ten cuts through 2026 has evaporated.
With President Trump’s intended policies increasing the national debt, encouraging domestic investment and likely creating inflation, the Fed will be willing to support the need for multiple rate cuts.
The fallout has already seen 10-year yields rise 50 basis points in the past month, and if debt levels continue to rise unchecked, investors will demand greater returns for the inherent increased risk.
The impact is that mortgage rates will remain higher and this has a direct impact on consumers, something that, if inflation also picks up, could blunt the economic growth benefits of President Trump’s policies.
For investors, there are now higher interest rates for the longer-expected fixed income markets, but with the promised tax cuts there could be a tightening of spreads as large companies have more attractive debt profiles than the US government.
All of these potential policy changes will create opportunities as markets tend to overreact to the rumor and then slowly figure out the real economic impact.
If there is more relaxed supervision in the financial sectors, it will not only benefit those names but also generate mergers and acquisitions in segments that may not have been expected.
The underlying assumptions about earnings changes will be slower to change, but as the forest emerges from the trees, the medium-term impact will highlight potential undervalued names.
There are still more than two months before President Trump is inaugurated back into the White House, but the implications of his second term have already washed out the backlash that the next four years could generate.
–James Balfour
CFA (Senior Portfolio Manager)
LOM Financial (Bermuda) Limited