Investors saw sharp market movement the day following the election
Donald Trump and the Republicans outperformed expectations on Election Day, securing the White House and Senate by the time markets opened on Wednesday morning. At the time of writing, control of the House is unknown and likely will be for days, if not weeks. However, the rightward shift from voting patterns in 2020 bodes well for across-the-board Republican government control. Trump is also likely to win the popular vote, causing fears over a contested election to fade away.
Similar to the price action following the surprise Republican sweep in the 2016 election, equities, fixed income, and currency markets have moved sharply to reflect a huge shift in investors’ policy expectations. Then, as now, investors appear to view the combination of the fiscal, tax, and regulatory policies of a second Trump administration as positive for nominal growth, helping equities and the dollar, but potentially inflationary, hampering fixed income returns. While the knee-jerk reaction plays out in markets as the final votes are tallied in the remaining House contests, investors should remember the key insights we laid out in our pre-Election report from mid-September:
- Stocks have historically tended to gain ground between Election Day and Inauguration Day, regardless of the winner.
- The S&P 500 has historically moved 9.4% higher on average in the twelve months after the Election since 1948.
- Equity volatility has tended to decline in the year after a Presidential election.
Turning back to the here and now, seeing where the House settles and the size of the final Republican majority in the Senate are the two big political unknowns. The initial market reaction has largely followed the same playbook from eight years ago, but our Investment Team would caution against drawing too many parallels between 2016 and 2024.
Source: Bloomberg, data as of market close on November 5, 2024 through market close on November 6, 2024, and market close November 8, 2016 through market close on November 9, 2016. Please see attached disclosure.
Multiple factors may prove less helpful this time around, including the fact that Trump is now a known commodity and tariff policy may feature more prominently in his second administration than in the first. The starting place for markets and the economy is also substantially different than eight years ago: equity valuations are higher, economic growth is stronger, government deficits are wider, corporate and individual tax rates are lower, and interest rates are much higher. With that said, don’t miss the big picture takeaway – last night’s result could be a positive set-up for equity markets and more challenging for fixed income returns going forward.
No matter if your preferred party or candidate won or lost last night, we can all take comfort in the fact that our elections once again accomplished what they were designed to do: discern the will of the people. Emotions on all sides are bound to ease over the coming days and weeks. Meanwhile, our team at Horizon is committed to digging into the newsflow as it materializes and providing you with the necessary communication to help you navigate what is to come.
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