Written by Ashwin Gurung
Following last week’s victory in the US presidential election for Donald Trump, US equities, as measured by the S&P 500, rallied +4.8% in GBP terms. The impact of this victory was especially evident in more domestically focused US smaller companies, which gained +8.8% over the week, as measured by the Russell 2000 Index, in GBP terms. Trump’s policies are considered more favourable to small companies due to proposed lower personal and corporate taxes, a looser regulatory environment for corporations such as banks, which creates a better climate for deal-making and lending, and high tariffs on foreign goods entering the US.
However, some see aspects of Trump’s policy as inflationary, with interest rates remaining higher for longer and potentially limiting future economic growth. We note that substantial research has been conducted on this issue, including studies from the International Monetary Fund. These studies indicate that, in the medium term, tariffs and reduced free trade tend to lead to lower output, decreased consumption, reduced spending power, higher unemployment, and exchange rate appreciation, all of which are deflationary forces. Ultimately, the negative long-term impact of tariffs on economic growth outweighs the initial one-off impact on prices.
Nevertheless. due to the more inflationary narrative, Trump’s victory initially had a negative effect on US government bonds. However, the losses were reversed later in the week following the Federal Reserve’s (Fed) decision to cut interest rates for the second time this year. The Fed reduced rates by 25 basis points to 4.5%-4.75%, but the Fed Chair Powell emphasised that they will remain data-dependent and noted that the election will not influence future policy decisions, reaffirming their independence. US long-dated government bonds, as measured by the Bloomberg US Treasury 20+ Years Index, ended the week up +1.8%, in USD terms.
We continue to believe that US interest rates remain elevated and that the full impact of higher rates has yet to be fully felt in the economy. Highly indebted small businesses in the US continue to face mounting financial pressures, as do lower-income consumers, as evidenced by rising auto loan and credit card delinquencies. Additionally, savings rates have fallen to very low levels, making it difficult for these consumers to sustain spending.
Similarly, here in the UK, the Bank of England (BoE) also cut interest rates for the second time this year by 25 basis points. BoE Governor Andrew Bailey indicated that future rate cuts are likely to be gradual if inflation falls as expected. Regarding Labour’s budget, Bailey stated that the BoE ‘will need to see more’ to assess its impact on inflation. This rate cut also supported Sterling bonds, as the Bloomberg Sterling Aggregate Index returned +0.2% over the week, in GBP terms.
While the effects of Trump’s policies and Rachel Reeves’s budget outcomes are yet to be seen, it is important for us to maintain highly diversified portfolios across various asset classes, market caps, and styles to capture opportunities while effectively managing risk.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 11th November 2024.
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