US election outcome: Market reaction and outlook
Donald Trump has been re-elected as the 47th President of the United States, with the Republican Party regaining control of both the Senate and the House of Representatives. This political shift is expected to bring significant policy changes, which could impact various sectors and the overall market.
Following the election, US stock futures surged, and the US dollar strengthened. The S&P 500 futures rose by 2.3% in pre-market trading, driven by expectations of corporate tax cuts under Trump’s administration. However, investors should be cautious of potential volatility as markets adjust to the new political landscape.
Economic Policy Outlook
The Trump administration is likely to prioritise limiting the flow of goods, capital, and people across borders.
Key policy areas include:
Corporate Taxes and Earnings: Trump plans to maintain the corporate tax rate at 21% and has proposed further conditional tax cuts to 15%. This could support corporate earnings and alleviate concerns about potential tax increases.
Trade and Tariffs: A 20% universal tariff on imports and a 60% tariff on goods from China are on the agenda. While these tariffs aim to boost domestic production, they could also increase inflation and reduce growth in the short to medium term.
Infrastructure: The administration is expected to launch initiatives to upgrade US infrastructure, focusing on highways and communication, driven by private investment incentives.
Immigration: Policies to end benefits for undocumented immigrants could reduce the low-wage labor pool, impacting companies reliant on low-cost labor.
Defense: Trump aims to reduce support for Ukraine and encourage increased military spending by Western allies. This could lead to a pullback from US defense commitments overseas.
Energy: Deregulation of fossil fuels and potential changes to the Environmental Protection Agency’s EV standards are expected. While renewable energy initiatives may continue due to economic benefits, the pace of EV adoption could slow.
Healthcare: Efforts to reduce drug prices and expand domestic manufacturing of drugs are anticipated, alongside potential reversals of Biden-era policies.
Investment Implications
Investors should avoid making tactical changes to portfolios based on the election results. Instead, focus on managing portfolio allocations and targeting fundamentally attractive market segments likely to benefit from potential policies.
Key sectors to watch include:
Oil and Gas: Benefiting from deregulation and potential infrastructure investments.
Financial Services: Supported by corporate tax cuts and deregulatory efforts.
Healthcare: Opportunities in drug manufacturing and potential policy reversals.
High-Dividend or Dividend-Growth Segments: Attractive for income-focused investors.
Portfolio managers will continue to evaluate the impact of policy changes on individual holdings, focusing on sectors and companies with a neutral, negligible, or positive outlook.
Potential Benefits and Challenges for Financial Markets
Benefits:
- Corporate Tax Cuts: Lower corporate taxes could boost corporate earnings and stock prices, particularly in sectors like financial services and healthcare.
- Deregulation: Reduced regulatory burdens could enhance profitability for companies in the oil and gas, financial services, and healthcare sectors.
- Infrastructure Investment: Increased infrastructure spending could stimulate economic growth and create investment opportunities in related sectors.
Challenges:
- Trade Wars: New tariffs could ignite trade wars, increasing costs for US consumers and businesses, and potentially leading to higher inflation and slower economic growth.
- Immigration Policies: Reducing the low-wage labor pool could increase labor costs for companies reliant on low-cost labor, impacting profitability.
- Defense Spending: Shifts in defense spending and foreign policy could create uncertainties for companies involved in defense and related industries.
Implications for the Australian Economy and Financial Markets
Australia’s economy and financial markets could be impacted by Trump’s re-election and the resulting policy changes:
Trade Relations: Australia’s trade relationship with the US could face challenges if new tariffs are imposed. While Australia has a free trade agreement with the US, careful diplomacy will be required to avoid being caught in broader trade conflicts, particularly between the US and China.
Commodity Exports: Australia’s commodity exports, especially to China, could be affected by US-China trade tensions. A slowdown in China’s economy due to trade wars could reduce demand for Australian exports, impacting the Australian economy.
Currency Fluctuations: The strengthening US dollar could lead to a weaker Australian dollar, affecting import costs and inflation in Australia. However, a weaker Australian dollar could also make Australian exports more competitive globally.
Investment Opportunities: Deregulation and infrastructure investments in the US could create opportunities for Australian investors in sectors like oil and gas, financial services, and infrastructure.
Defense and Foreign Policy: Changes in US defense and foreign policy could impact Australia’s strategic and defense relationships, particularly in the context of the AUKUS agreement and regional security dynamics.
Conclusion
Trump’s re-election and the Republican sweep signal a shift in US economic policies, with potential implications for various sectors. Investors should remain focused on fundamental views and manage portfolio allocations accordingly, rather than reacting to short-term market volatility.
If you have any questions or would like to make an appointment, please contact the Propel Financial Advice team.
This newsletter is for informational purposes only and does not constitute financial advice. Please consult with a financial advisor for personalised recommendations.
