ClockWise: Sentiment improves following the US election

Polling was close going into the US elections last week where, according to many pollsters, the race was too close to call. In reality, Kamala Harris performed much worse than expected, with Donald Trump winning the presidential election fairly comfortably.

It appears that the Republicans have won the House in addition to the Senate. The so-called red sweep outcome has been met with a positive reaction in equity markets, with US stocks in particular seeing a lift.  

Investor sentiment lifted from fearful levels

Equity markets were volatile running up to the election, with the event certainly contributing to investor nervousness. VIX reached 23, the highest level since the August sell-off (which was driven by US recession fears). Our measure of investor sentiment actually reached ‘depressed’ levels during the run up to the election, triggering in late October, following two consecutive weeks of declines for stock markets.

As we have highlighted before, investor sentiment is often a contrarian indicator and it can pay to buy when the investor community is at its most nervous. Since our sentiment indicator triggered, equity markets have rallied sharply and are up over 5% from the October lows.

With the risk event of the election behind us and equity markets having jumped over recent sessions, we note that investor sentiment has now moved back into neutral territory.

Chart 1: Investor sentiment back at neutral levels, having flagged overly depressed pre-election

Source: Royal London Asset Management and LSEG Datastream. Composite sentiment indicator includes factors related to market volatility, retail investor bullishness and US directors dealing in shares in their own companies. A reading of -1 or lower indicates a market panic and contrarian buy signal, a reading of greater than +1 indicates bullish investor sentiment. As at 08/11/2024.

Will market positivity continue?

Markets have so far taken a very ‘glass half full’ view of the US election outcome. However, it is not obvious whether a Republican win will continue to be a tailwind for equities from here.

Newly elected President Trump ran a campaign promising a slate of tariffs, which would likely be a negative for global growth and lead to higher levels of inflation. While markets have so far traded positively on the prospect of looser regulation and fiscal stimulus, there may be downside risks ahead. During the last Trump presidency, bouts of volatility were very common, particularly during the trade war with China during 2018-2019.

With markets nervous while there was a possibility of the US election result dragging on, we see a reduction in uncertainty now that it has been comprehensively won. The underlying macroeconomic backdrop also remains supportive for now (with leading growth indicators and business confidence improving, while central banks globally continue easing policy). Therefore, for the time being, we are believe a positive view on global equities is justified.

We note the strong outperformances of US assets, including the dollar and US equities since the election (Chart 2). We have had a positive view on both of these assets and with the underlying theme of ‘America first’ likely to be front and centre under Trump, domestic assets could continue to outperform over an extended period.

Chart 2: US vs Equally Weighted World Equities

Source: LSEG Datastream, Bloomberg, RLAM as at 11 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.