- President Trump completing the trifecta winning the White House, the Senate and the House bodes well for the stock market.
- The stock market has continued rallied strongly in the wake of the election, but President Trump 2.0 is set to benefit pockets of the market such as small caps, financials and oil and gas, vehicle manufacturers and cryptocurrencies.
- Investors must remain vigilant, with many moving parts still needing to fall in place for the secular bull market to continue starting with the Fed interest rate decision later tonight.
The mandate from the people is clear. Donald Trump will be the 47th president of the United States. Not only has he won the popular vote, he also looks to have potentially completed the trifecta, with Republicans winning the majority in the Senate, and making gains towards potentially winning the House as well. We break down what investors should watch for as Trump returns to the White House.
A unified government tends to bode well for the stock market
While theoretically, most investors if quizzed will tend not to prefer a sweep, a sweep tends to bode well for stock markets. According to Evercore strategists led by Julian Emanuel, since 1928, annualized returns for a unified government, be it the Republicans or Democrats, are at about 9%. This beats out returns during a divided government by about 2%. With President Trump and the Republicans looking set to win the House as well, this could see a continuation of the secular bull market.
The aftermath of a Trump victory
A stock market rally post-election tends to be the norm. After the last five elections, we have seen stocks rally in November and December, with December seasonally being one of the strongest months for stocks in an election year. And we are off to a great start this year, with the three major indices of the Dow, S&P 500 and Nasdaq all surging to record highs after the election in one of the best performing days of the year. The Russell 2,000 also joined in the rally, pushing past prior swing highs looking to retest all-time highs. This post-election bounce also comes alongside heavy downside in the S&P 500 Volatility Index that moves back below 20.00.
As mentioned in our report last week, it is likely that stocks would have rallied in the short-term even in the case of an election victory for Vice-President Harris. But it is important to remember that even as the political uncertainty fades, the market still has to deal with earnings and also watch if the Fed can engineer the much hoped for soft- or no-landing scenarios. With the Fed interest rate decision still to come later tonight, keep an eye on commentary and the Fed-rate cut path. This will likely have a strong bearing on the market moving forward.
Figure 1: The post-election rally from the markets
Which pockets of the market could potentially benefit from President Trump’s return to the White House?
1. Small caps
President Trump protectionism and deregulation policies with potential tax cuts targeting domestic-oriented businesses could benefit small caps. Deregulation also could have an outsized impact on small cap companies by helping to reduce regulatory costs that weigh on small caps. Small caps have underperformed heavily in the past few years, but we have potentially seen the beginnings of a rally, with the Russel 2,000 managing to push past prior swing highs and trading towards its prior-all-time highs for the first time in three years. Investors interested in small caps can look at the iShares Russell 2000 ETF (NYSE: IWM).
2. Financials
Like in small caps, deregulation could help the financial sector as it helps to enhance profitability, but also spur lending activity that could benefit financial institutions. Tax cuts also can improve business sentiment that can improve business activity. Diversified banks with a strong presence in multiple areas like retail and commercial such as JP Morgan (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) will likely benefit.
3. Oil and gas
President Trump’s oft spoken “drill baby drill” is a clear illustration of his policy direction. He will likely favor domestic fossil fuel producers with a direction of securing US energy independence. This mandate for increased production could also see more relaxed environmental regulations and lower corporate taxes once again that could benefit local producers like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).
4. US vehicle manufacturers
While Tesla (NASDAQ: TSLA)’s CEO Elon Musk’s connection with President Trump fueling hopes of strong returns for his company in President Trump’s return to the White House, TSLA alongside US vehicle manufacturers such as Ford (NYSE: F) and General Motors (NYSE: GM) will likely benefit from President Trump’s stated protectionism policies that include potentially higher tariffs on Chinese imports and Chinese-made EVs.
5. Cryptocurrencies
In the aftermath of the election, cryptocurrencies has pulled into all-time highs with Bitcoin surging nearly 9%. President Trump has a stated ambition of making US the “crypto capital of the planet”. Nomination of a pro-crypto US Securities and Exchange Commission (SEC) chair could also go a long way in helping adoption of cryptocurrencies. Investors interested in investing in the largest cryptocurrency Bitcoin can look at spot exchange traded funds that trade in Bitcoin as the underlying asset such as iShares Bitcoin Trust (NYSE: IBIT) and Grayscale Bitcoin Trust (NYSE: GBTC).
What does this mean for investors?
While the stock market potentially looks set to continue its secular rally, there are still many moving pieces in the market that could weigh on the stock market. President Trump’s return to the White House may not be all good either, with the recent spike in treasuries being attributed to concerns around tariffs and tax cuts, with tariffs in particular worrying investors about a potential reinflation. There are also worries that the budget deficit could be exacerbated. While short-term strength remains likely, there are many other moving parts that has to fall in place for the secular bull market that we have seen to continue. Investors should not be complacent and should remain watchful.
Disclaimer: ProsperUs Head of Content & Investment Lead Billy Toh doesn’t own shares of any companies mentioned.
