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Trump win gives Republicans strong mandate

Insight
6 November 2024 |
Macro
Federated Hermes CIOs react to the US election.
Stephen Auth, CFA
Executive Vice President, Chief Investment Officer, Equities

Trump wins « Bigly »; Senate flips; House still undecided. Confounding the experts, President Trump handily won the Presidential election late on election night. Along with this, he solidly flipped the Senate; the only branch of government undecided as of this moment is the House, which will be important to how aggressively Trump can implement his agenda. While we are waiting for final confirmation on the House, which might not come until Friday, remember this: The world as we know it has not just ended, wherever you are on the political spectrum. And as we’ve noted repeatedly, the U.S. economy is a large, private sector-driven organism whose organic forward direction is hard to stop, regardless of who is in charge in Washington.

History tells us that the best course for investors is to remain in the market rather than time it based on party affiliation. This said, the outcome from last night likely will impact which sectors do best. As we’ve noted repeatedly, Trump’s growth agenda—lower taxes, deregulation, increased inbound U.S. investment via tariff negotiations—is a wind at the back of the Old Economy and supports the other forces already favoring these sectors of the market. The market’s initial reaction certainly appears to agree with us, and fortunately our balanced model’s overweight to equities in general and Old Economy sectors in particular (Value and Small Cap) is working “bigly.” We are watching the bond market sell off closely; our balanced models are under-weight there along with the related large-cap growth stocks, as the conventional wisdom has been that Trump is bad for deficits. We disagree on a longer-term view, and are considering backfilling our bond/growth underweight on what we view as an overreaction by bonds; watch for our upcoming Market Memo (Is Trump playing chess and bonds playing checkers?)

One last point: if the House flips to the Democrats, mixed government is not necessarily market positive because a frozen legislative agenda could lead to a huge tax hike and/or a deficit busting compromise next year. That could ultimately diminish the outlook for next year. Stay tuned.

History tells us that the best course for investors is to remain in the market rather than time it based on party affiliation.

Deborah Cunningham
Deborah Cunningham, CFA
Chief Investment Officer, Global Liquidity Markets, Senior Portfolio Manager, Executive Vice President, Federated Hermes, Inc.

Trump’s economic agenda could be inflationary, but money markets are already turning their attention to the Fed meeting. In the short term, Trump’s victory means less to the money markets than to other asset classes, although we have seen a modest backup in yields this morning. In the long-term, however, we are concerned that some of his economic policies, particularly tax cuts, higher spending and tariffs, could be inflationary and increase the national debt. Also, increased regulations on banks could affect supply. The House has yet to be decided, but a divided Congress likely will hamper some of Trump’s agenda. But either way, we are likely to see a new tax law that mimics or even lowers taxes when the Tax Cuts and Jobs Act expires late next year. This could mute the demand for muni securities and cause their yields to increase.

Monetary policy has more impact on the liquidity space than fiscal, but the president has the ultimate say over who will lead the Federal Reserve. Chair Powell’s term doesn’t end until 2026, but will he want to stay? Will President Trump want him to stay? Some contentiousness could lie ahead. For now, we are looking past the election to the Federal Reserve’s meeting that concludes tomorrow. We agree with the futures market in expecting a 25 basis-point cut. This near-certainty, and the fact this meeting does not include economic projections, means the focus will be squarely on Powell’s Q&A session with reporters.

Robert Ostrowski
Executive Vice President, Chief Investment Officer

Bond markets respond predictably to a Trump win. There is a strong possibility a red sweep will be the final outcome of the election, but regardless of the House, the Republicans received quite a mandate last night. With that in mind, Trump’s plans for increased tariffs, limits on immigration and new or extended tax cuts will likely become the base case for expected policy. While the bond market had somewhat priced in a “Trump trade”—higher rates and a steeper yield curve—prior to the election, the trade accelerated as the results became clear on election night. We entered election day neutral on duration, but positioned in the steepener, as we believed a doveish Federal Reserve and recent stronger economic data also argued for that positioning.

Moving forward, we will be watching closely as to whether this rate pressure, which is consistent with the 2016 post-election market action, will lead to volatility in the spread markets.

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