Initial Market Reaction
Markets rallied significantly post-election, driven more by the decisiveness of Trump’s victory than by his policies. With a decisive electoral college and popular vote win, as well as control of both the House and Senate, concerns about prolonged uncertainty from a close election were alleviated.
Since the initial rally, markets have stabilized, with the overall markets up approximately 2-3%, hovering near all-time highs for the S&P 500.
Sector Performance (through Nov 20, 2024)
Winners:
Financials: Optimism surrounding increased capital markets activity, IPOs, mergers, and acquisitions (M&A).
Software: Anticipated regulatory leniency, contrasting with Biden’s FTC, which was more restrictive on M&A.
Crypto: Trump’s pro-crypto stance and promises of clearer regulation have fueled a strong rally.
Energy: Pro-energy production policies benefiting traditional hydrocarbon sectors.
Industrials: Focus on reshoring manufacturing from China to the U.S.
Losers:
Healthcare: The nomination of Robert Kennedy Jr. as Secretary of Health and Human Services signals potential disruption.
Clean Energy: Renewable energy projects may face challenges due to Trump's preference for traditional energy sources.
Metals: The US Dollar rallied strongly after the election, creating headwinds for gold, silver, and copper.
Policy Themes and Economic Implications
Fiscal Situation
Given decades of undisciplined fiscal policies, the US is currently running extremely large (for peacetime) deficits, and the debt-to-GDP ratio is getting to levels where it could be seen as untenable for other countries that buy our debt. There are several ways out of this situation: dramatically cut spending and/or raise revenue (taxes), grow our way into the debt, or inflate away the debt. This is where, ultimately, the person who gets nominated to be Treasury Secretary is important. As we write this, Scott Bessent has re-emerged as a top contender for the job. Scott is a very smart macro hedge fund manager and Trump supporter. Scott has repeatedly discussed a path to grow out of our debt problem through deregulation and energy independence.
Deregulation
Relatedly, a cornerstone of Trump’s second-term agenda is deregulation, highlighted by the proposed Department of Government Efficiency, led by Elon Musk and Vivek Ramswamy. This agency will be tasked with reducing government bureaucracy and regulations, looking to ignite private-sector economic activity.
Inflationary Pressures
Several Trump policies may drive inflation:
Tariffs: Could raise prices on imported goods.
De-globalization: Reshoring manufacturing increases costs.
Immigration policies: Reducing labor supply could push wages higher.
While Trump may not intend inflation to rise, strong GDP growth could exacerbate it.
Other Emerging Trends: Prediction Markets
Prediction markets, like Polymarket and Kalshi, have gained traction as tools for gauging event outcomes. Leading up to the election, these platforms offered insights closer to the actual results than traditional polls. As platforms like Robinhood and Interactive Brokers enter the space, prediction markets may become valuable real-time sentiment and forecasting sources.
Conclusion
Trump's focus on deregulation is likely to incite animal spirits and help fuel the economy but with the risk of inflation as a byproduct. Much will depend on his ability to confirm some of his cabinet members and the effectiveness of his government efficiency efforts. Monitoring these developments closely in the coming weeks and months will be important. Emerging tools like prediction markets could further inform future analyses.
