ClockWise: Good Trump, Bad Trump

US equity markets were one of the asset classes to celebrate the most following the result of the US election earlier this month.

The asset class recorded its best week of 2024 so far after Donald Trump surprised many pollsters and recorded a resounding win over Kamala Harris. Last week saw a bit of a retracement in this excitement though, with US stocks giving back some earlier absolute and relative gains (Chart 1). This leaves the S&P 500 index around 2% below all-time highs.

Chart 1: US vs Equally Weighted World Equities

Source: Bloomberg, RLAM as at 15 November 2024.

The initial reaction to Trump’s victory was risk-on, with investors arguably focusing more on the policies expected to have a positive impact on growth, and equity prices, such as deregulation and tax cuts (‘Good Trump’). Narratives tend to change quickly in current markets, however. Last week the focus turned to the potential negative impacts of tariffs, trade tensions and broader geopolitical concerns (‘Bad Trump’), which could act as a drag to global growth and subsequently weigh on risk asset performance. Another blow to equity markets came from developments around Trump’s nominees for his future administration. The nomination of Robert F. Kennedy Jr. (RFK) for the Health Secretary spot saw a sharp fall in US healthcare stocks, with the sector trading down 5.5% on the week and selected names down double-digits. RFK has been vocal about his ‘anti big pharma’ agenda, and therefore his appointment has increased perceived risks to corporate profitability within the sector.

In related developments, government bond markets diverged over the last week: US bond yields continued to push higher, but yields in the eurozone have, if anything, come down a bit. The election outcome has likely played a part in this, as markets assess the implications of Trump’s policies. Tax cuts and a looser regulatory environment are seen as a potential upside for US growth, and to inflation when combined with tariff hikes.

However, tariffs are likely to weigh on European exports and the euro area is very unlikely to replicate Trump’s tax and regulation agenda. Added to that, real GDP growth in the US has continued to run far above that of the eurozone, with incoming data still looking resilient in the US. Against this backdrop, markets are now expecting only 60 basis points (bps) of cuts from the US Federal Reserve from current levels, which would reach a policy rate of 4% by mid-2025; over the same period, the European Central Bank is expected to cut rates by more than double that – 130bps to 1.9% (Chart 2). The cherry on top last week came from Fed Chair Jerome Powell, who described the performance of the US economy as “remarkably good”, adding that “the economy is not sending any signals that we need to be in a hurry to lower rates.” We continue to prefer global equities to government bonds in this environment.

Chart 2: Market pricing for ECB and FED policy for June 2025

Source: Bloomberg, RLAM as at 18 November 2024.

This widening differential between US and European yields and forward expectations has been a significant driver of US dollar’s strength against the euro. The US dollar has now appreciated for seven consecutive weeks, rising to the highest level versus the euro in more than a year (Chart 3). We think there might be more to come and still hold a positive view on the US dollar versus most other G10 currencies.

Chart 3: EURUSD (inverted) and US 2-year yield less German 2-year yield

Source: Datastream as at 15 November 2024.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.