America’s Thanksgiving this week will be a time for celebrating the positives of the past year, but also, perhaps, a time to ponder the great change that lies ahead. The aftermath of the US election has certainly given markets plenty to think about, both in terms of the future economic landscape and America’s place in the world.
The “Trump Bump” seen across stock markets has, so far, been almost entirely confined to US shores. Foreign markets are, quite rightly, in the process of assessing potential trade tariffs, which could risk downturns in their home economies. For its part, America has momentum on its side, something most overseas markets currently lack.
The president-elect’s America First mantra sends a clear message that growth at home is a priority. Tariffs and deregulation could be set to benefit US banking and commerce, while tax cuts would provide a boost for consumers and businesses alike.
The election has also helped to underline the pre-eminence of US companies, particularly in new technologies. Elon Musk’s new role at the heart of government suggests the new economy will be a strong focus for the new administration. Reports of moves towards building a federal framework for self-driving vehicles is a prime early example1.
The big question is: will the market optimism soon fade? It might, but what will be important will be the President-elect’s distinctive approach over the next four years. His solution to the growth challenge appears to hinge on tax cuts as well as a drive to cut red tape and deliver small government.
The US economy certainly looks well primed and ready, having expanded at a 2.8% annual rate in the third quarter after recording 3% growth the quarter before2. The economy has shown itself to be resilient in the face of shocks, supported by a sharp fall in inflation and a generally healthy labour market.
Having avoided the recession that some feared during the first half of the year, forecasts have been pointing to US growth of around 2.5% or maybe more for the full year, and that’s from before the election result was known. Official forecasts suggest the economy may grow at a slower pace of around 1.7% next year but this doesn’t take account of the latest seismic shift on the political scene3.
As ever, there are risks. US stock market investors have been required to contend with high valuations for much of the past year, and that hasn’t changed since the election. European markets look positively cheap by comparison, raising questions as to whether the balance has already shifted too far westwards.
Recent trading sessions in New York suggest the Trump Bump could quite easily fade. Current market fears revolve around the reduced likelihood of interest rate cuts. While a further rate cut in December remains a possibility, the latest polls of interest rate traders suggest a reduction is no longer a foregone conclusion4.
There’s also the risk that the market begins to take the view nothing comes without a price. Some studies have concluded that tariffs had a net negative effect on economic output and employment last time out5. Moreover, future tariffs will likely impact US consumer companies through higher input costs. Renewable energy businesses too may now face a less friendly regime. For them, “drill baby, drill” will be anathema.
The bond markets present another challenge. The cost of borrowing –as measured by 10-year Treasury yields – has risen to around 4.4% from around 3.7% in mid-to-late September6.
That cost could rise further still if more serious concerns about the fiscal sustainability of the government’s plans take hold. Higher bond yields mean not only tighter credit conditions but also accentuate high share valuations.
Another factor worth bearing in mind is the strength of the US dollar. Despite a 0.75% reduction in interest rate cuts since September, the US dollar has soared over the past month.
While this will help to keep import prices compressed, it will hurt exports and the earnings of American multinationals.
Despite these challenges, it’s hard to ignore the underlying strength of America’s corporate sector, or that the country has skirted a recession without the assistance of a sustained period of lower interest rates. Company earnings are currently expected to grow by around 9% this year and 15% next7. These factors support the case for a continuation of the current bull market. At just two years old, it remains relatively young.
In the face of uncertainty, staying diversified still constitutes a sensible investment approach.
Sources:
1 Bloomberg, 17.11.24
2 US Bureau of Economic Analysis, 30.10.24
3 The Conference Board, 23.10.24
4 CME FedWatch, 21.11.24
5 Tax Foundation, 26.06.24
6 Federal Reserve Bank of St Louis, 19.11.24
7 FactSet, 15.11.24
8 Dodge & Cox, 30.09.24
