For those of you who would prefer to listen:
November 5th, 2024. It’s a date that has been circled on the calendar since 2023 concluded. The hype is over. It finally came; The consequential American Presidential election. The people mailed in their ballots and headed to the voting booths in size. The mood had been extremely tense, at times vitriolic, with a surplus of nervous energy. That’s pretty much how the Market had been behaving of late. Traders had been anxious about outcomes that could shape Washington’s agenda for years ahead. The country is sorely divided. One thing the American people agreed upon heading into the election is the nation’s current state. 70% believe the country is on the wrong track. Change has been a constant theme.
Now we know. Donald Trump is returning to the White House for a second term. The Market had been anticipating it. There were serious concerns that whatever the outcome, it would take days, if not weeks to know. The result was clear Tuesday night. The Market liked the certainty. Stocks surged as did the Dollar, Bond yields and Cryptocurrencies with confirmation the 45th President will now become the 47th as well.
The Trump Trade returned. These are sectors that seemingly benefit from easier fiscal policy, high tariffs, low immigration and looser regulation. Banks and Industrials caught a huge bid. Tech did as well. However, the reverse is true too. Stocks and sectors that are threatened by retaliation of tariffs have felt some pain. Big American brands are the targets. Their stocks were held back from the rally.
The record run for stocks has been explosive. It’s come in the face of so much uncertainty and angst. Valuations are seriously stretched. Risk keeps rising. Getting through the election removes one major overhang. The response feels like a relief rally. But the price action has gotten a little screwy. One of our sources on the Street, a really smart and seasoned strategist, referenced the current Market conditions like this: “This is your conductor…the train is approaching Crazy Town.”
Volatility spiked ahead of the election. The Trump Trade momentum reversed in the days leading up to the election as polling data turned in favor of Harris. That proved to be short-lived.
The Dollar strength weighed heavily on commodities. It impacted US multinationals too, which have a large chunk of their revenues overseas. The Euro and British Pound Sterling felt the pressure. Importantly, Trump has been an advocate for a weak Dollar, which makes American goods more attractive on the global scale. This is something his administration will likely address ahead.
Corporate America has already started moving. President Trump is expected to hike tariffs as high as 60% to 100% on goods from China, and 10% to 20% on all other imports. Some companies have already made contingency plans, but others are now scrambling to adjust their business models to account for what’s coming. It will impact companies that rely on supply chains around the globe.
Europe has already been struggling economically. The Union has another challenge. It will need to increase its defense spending and taking on more responsibility within the NATO alliance becomes more urgent.
Ukraine is back on center stage with uncertainty of how the Trump administration will respond. The French and German effort that has basically taped the European Union together is breaking. French President Emmanuel Macron’s popularity has shrunk. German Chancellor Olaf Scholz’s coalition is on the verge of collapse. They’re very nervous in Europe.
Trump’s tariff plans could reduce GDP in Europe by an estimated 0.7%, impacting its Economy. It was already experiencing sluggish growth. Exports are key to Europe. They’re now the target of tariffs. The Eurozone’s strategy of exporting its way out of economic stagnation faces new limitations. However, if Trump were to push for peace in Ukraine, it could reduce the risk premium in European assets.
European traders prepared for the US election by shorting the Euro currency. In fact, it was the largest short position in the Euro in 4 years. €4.6 Billion were wagered on it falling to parity if Trump won. Both candidates’ spending plans added complexity to interest rate bets.
Chinese stocks were particularly hit hard, as prime targets for tariffs. The threat hangs over Beijing just as President Xi is busy trying to stabilize the Economy. China is bracing itself for a trade war. China’s challenges just got much more complicated.
Beyond the election, there was a Fed meeting. The Fed cut rates again, exactly as the Market expected. The focus was on the Fed Chair’s commentary on firmer growth and disinflation. But the winds have changed in Washington.
Fed Chair Powell was clearly irked when asked if he was going to resign his post. Powell’s not going anywhere, at least not until 2026 when his term is up. But his job will no doubt be harder when Trump returns to the White House in January. In fact, it’s already become more complicated since election night.
Trump and Powell don’t see eye-to-eye on monetary policy. They don’t seem to agree on much of anything. The President wants to have a say in monetary policy, while Powell has steadfastly defended the Fed’s independence from politics. This is clearly going to be a battle which can create some tension within the financial system.
The Fed can’t, and won’t be able to ignore Trump’s tax cuts and aggressive spending plans. They have the growing potential to stoke inflation again. The Bond Market has already moved on that premise. The 10-Year Treasury yield jumped nearly 1% while the Fed cut by 3/4%. That’s a warning sign for excess spending.
Yields slipped back a bit heading into the weekend. It’s calmer, for now. But there’s also that ballooning $36 Trillion in Federal debt out there, with no plans to pay it down. The Bond Market doesn’t like that.
There’s a new wildcard in the Trump orbit. It’s Elon Musk. He is a lightning rod of personality and controversy. Elon Musk has disrupted the car industry and space travel. He’s become a major force in health care and AI too. What role will Musk play? He’s already considered an Ambassador for US Tech. There’s been talk that his focus will be Federal Government efficiency.
Musk has often criticized the inefficiencies of government, calling it waste. His involvement could mean significant spending cuts and job losses with a goal of making Big Government smaller and leaner. Government reform appears inevitable. Musk is the ultimate disruptor. A Silicon Valley approach to Washington would sure shake things up. As Trump put it: “A star is born.” He’s already the richest man in America. Elon Musk has become a consequential figure around the globe.
Another consequential person could be hitting the exit door. Her name is Lina Khan. She’s far less known than Musk. Khan is the Chair of the Federal Trade Commission. She has targeted multiple companies, including the threat of breaking up Google. Khan is perceived to be anti-business. The Market is celebrating her pending departure perhaps more than anything else. De-regulation; That’s a green light for M&A. The Market loves that.
Geopolitical tensions are still in play amidst reports Iran’s intended retaliation against the Israeli airstrikes will involve a stronger response than its missile barrage from early October. An Iranian official said the response will come after the US election day but before the January inauguration. That window has opened.
Iran’s tone shifted notably over the past week after initially playing down the severity of Israel’s airstrikes, coming to the view it had to respond after the attacks resulted in military casualties. Israel recently threatened more damaging strikes on Iran if it retaliated and target areas it avoided last time.
Israel’s Benjamin Netanyahu may feel he has a freer hand now to press on militarily against Iran, Hamas and Hezbollah. Trump reportedly plans to significantly increase sanctions on Iran and squeeze its Oil sales in the effort to weaken its support for its Middle East proxies. Hot wars and cold wars have become even more complicated.
Here’s the deal: It’s hard to have a new Cold War when the rest of the world resists taking sides. The United States and China are the largest global economies with very different ideas for the 21st century. But not just enemies, America and China are significant trading partners. The rest of the world is caught in the middle. That’s precisely what could keep the tensions cold. The alternative is far worse.
This election came at a time when people, the world over, are dissatisfied with where their countries are headed. Trust in political institutions is hitting rock bottom. Elections around the globe have bared this out. Fear and anger are on the rise. There’s a common theme of backlash against globalization and the elites who promoted their own interests at the expense of the general public. It was evident through Covid and even dates back to the Financial Crisis. Planet Earth is indeed a complex place.
Condoleezza Rice is someone I greatly admire. The former Secretary of State is a very thoughtful and pragmatic individual. She always held America’s values first. She posted this on Tuesday morning, as the polls opened:
“May God truly Bless America today. And may we all pledge to respect each other and our institutions, remembering to be grateful for the privilege of citizenship in this great country.”
It’s a good message. It’s an important message.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
