The US election results have implications for bond yields and stock sectors. Here’s a summary of what investors need to know.

Election results

The results of the 2024 US elections are in. The verdict is clear: a resounding Republican victory. Donald Trump will be the next president and the Republicans have taken back the Senate. The House is too close to call, but given Tuesday’s results overall, the Republican Party appears slightly favored to win a narrow majority in the House. Here are the implications for financial markets.

Market reaction

The strong market reaction reflects both the removal of potential uncertainty and the expectation of key changes in US policy.

Before the U.S. stock market opened, U.S. stock futures were up 2-4%, driven by the broader Russell 2000 index and boosted by a heavy rotation into mid-cap stocks. Asian and European equity markets reacted with more mixed results.

US bond markets sold off sharply, with 10-year US Treasury yields at 4.47%, up almost 20 basis points following the election announcement.

The U.S. dollar jumped about 2% against the yen and the euro. Cryptocurrencies have grown strongly, up 7 to 9%. Oil prices fell about 1%.

Market Outlook

Assuming, as seems likely, that the Republicans complete a clean sweep of Congress, market movements should continue in the coming days and weeks, based on expectations of stronger growth driven by cuts. taxes, larger budget deficits and deregulation.

Rising growth expectations should boost corporate profits, which could also benefit from lower statutory and effective tax rates (Trump has advocated cutting the corporate tax rate from 21% to 15%).

Growing business optimism about growth and reduced regulatory burden are likely to boost business investment spending.

The main beneficiaries are mid-sized companies, fossil fuel companies, pharmaceuticals and financial services.

Green subsidies in the Inflation Reduction Act are likely to be significantly reduced.

Trump will have strong support in Congress to reduce or even reverse immigration. This could impact the job market, creating shortages in areas such as construction, restaurants and health services.

Markets will expect budget deficits to widen under Republican rule, which we believe will push bond yields higher for at least two reasons. First, fiscal expansion will boost demand and hence growth. As a result, the Federal Reserve (Fed) will likely ease less than expected. Second, increasing deficits will lead to increased debt issuance. Yields on 10-year Treasury notes are expected to trend toward 5% over the coming months.

A combination of higher U.S. interest rates and greater foreign investment flows into U.S. public and private stocks will likely push the U.S. dollar higher in global foreign exchange markets.

Cryptocurrencies will likely continue to advance, thanks to a light regulatory approach during Trump’s second term.

The outlook for commodity prices is mixed in our view. Support for the US oil industry and the prospect of growing supply could put further downward pressure on crude prices. The same would be true for a stronger dollar. But stronger growth could lead to higher demand, which would be positive for the energy and basic materials sectors.

Geopolitical risks around the world will remain high and defense spending is expected to increase.

Market risks

The main risk for U.S. and global stock markets is rising bond yields. To the extent that higher yields reflect higher growth expectations, the result is less problematic. But to the extent that they reflect rising inflation expectations or a crowding out of investment due to large projected budget deficits, higher yields could cap overall stock returns.

A related risk is that the Fed could halt its easing of U.S. monetary policy and could even reverse course by raising rates. Rate hikes could occur if faster growth leads to higher inflation. In this scenario, bond markets will closely watch for signs that the Trump administration may attempt to restrict the Fed’s policy independence.

A final risk concerns American customs tariffs. On the campaign trail, Trump strongly advocated for large and sweeping tariffs. If implemented, this policy could harm U.S. and global growth (including through an escalation of the global trade war), increase measured inflation, undermine consumer purchasing power, and reduce corporate profits. due to rising input costs. It is therefore more likely that the Trump administration will use tariffs as a negotiating tactic in international trade and security negotiations.

Summary and conclusions

The US election result was an obvious surprise, as it delivered a firm verdict on who Americans prefer to lead the country. The removal of uncertainty and its positive implications for growth have triggered powerful advances in US stock markets, Treasury yields and the US dollar. These movements are expected to continue in the weeks and months to come. But investors should be wary of the risks of rising bond yields and a less accommodative Fed. and the risk of rising global trade tensions.

We believe trading with Trump is likely to continue, but we urge investors to be careful in drawing conclusions from the election results.

Stephen Dover, CFA, is Franklin Templeton Chief Market Strategist and Director of the Franklin Templeton Investment Institute. Originally published in Stephen Dover’s LinkedIn Newsletter, Invest this week. Follow Stephen Dover on LinkedIn where he publishes his thoughts and comments as well as his Global Market Outlook bulletin.

Disclaimer

Content copyright © 2024 by Franklin Templeton. All rights reserved. Used with permission.

What are the risks? All investments involve risks, including possible loss of principal. The value of investments may increase or decrease, and investors may not get back the full amount invested. Investing in the natural resources sector carries special risks, including increased vulnerability to adverse economic and regulatory developments affecting the sector. There are special risks associated with investing in foreign securities, including risks associated with political and economic developments, business practices, availability of information, limited markets and exchange rate fluctuations and policies. Investments in foreign securities involve special risks, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve increased risks related to the same factors, in addition to those associated with the smaller size of these markets, their less liquidity and the absence of legal, political, commercial and social frameworks established to support them. securities markets. Given that these frameworks are generally even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are amplified on frontier markets. To the extent that a strategy focuses from time to time on particular countries, regions, industries, sectors or investment types, it may be subject to greater risks of adverse developments in those areas of focus. interest than a strategy that invests in a wider variety of countries. , regions, industries, sectors or investments.

Important legal information. This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or adopt any investment strategy . It does not constitute legal or tax advice.

The views expressed are those of the investment manager and comments, opinions and analyzes are rendered as of the date of publication and are subject to change without notice. The information provided herein is not a comprehensive analysis of all material facts regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited this data. FTI accepts no liability for any losses arising from use of this information and reliance on the comments, opinions and analyzes contained in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the United States by other FTI affiliates and/or their distributors, as local laws and regulations permit. Please consult your own professional advisor or Franklin Templeton institutional contact for more information on the availability of products and services in your jurisdiction.

Published in the United States by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Templeton Distributors, Inc. is the leading distributor of Franklin Templeton Investments’ U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulations.

Image: iStock.com/Darren415

Article content provided by FundLibrary.com (original source)