Special Report written by LGT Crestone Senior Asset Allocation Specialist Matthew Tan and LGT Crestone Head of Public Markets Todd Hoare.
After the compelled withdrawal of a sitting US president, as well as multiple assassination attempts and criminal convictions, a contentious and eventful US presidential election campaign has drawn to a dramatic finish. Most major outlets are projecting that former president Donald Trump will become the 47th president of the United States in a result that, in the end, proved more decisive than the polling suggested. Despite having retaken control of the Senate, the Republican Party is yet to secure a ‘red sweep’, with the result in the House of Representative for now too close to call.
In this Special report, we outline the key results (that we know of so far) from the 2024 US elections and their likely implications for policy, the economy, and markets. In doing so, we strive to look beyond the news headlines to identify the key constraints facing the incoming president, the most probable market- relevant consequences, and present an astute investor’s guide to navigating Trump 2.0.
To borrow famous words from the Bill Clinton era, in the end, it came down to “the economy, stupid”. US voters followed a broadly similar pattern to their global peers in punishing the incumbent party over economic concerns related to the post-pandemic cost-of-living crisis and immigration.
Trump also managed to broaden his voting coalition, crucially outperforming his 2020 showing across a broad range of American voters. In contrast, Vice President Harris underperformed Joe Biden’s 2020 performance in several key demographics (including amongst African Americans and Hispanics) and in urban areas. Indeed, most outlets are projecting that he will sweep all seven swing states. Trump is also expected to become the first Republican president-elect to win the National Popular Vote since George W Bush in 2004.
Donald Trump will be the 47th President of the United States, winning all swing states and the National Popular Vote.
Coupled with their clear presidential victory, Republicans are also set to retake control of the US Senate with at least 52 seats. The extent of any potential Republican Senate majority will be crucial to watch—a smaller majority would see the Senate act as more of a constraint on President-elect Trump, while a larger majority (of 54 or higher) may, for example, enable Trump to bring more extreme nominees to his cabinet or key federal institutions, like the US Federal Reserve (Fed).
Meanwhile, the House of Representatives remains too close to call on the morning of 7 November 2024, though betting markets heavily favour Republicans maintaining control of this chamber too, potentially giving the party a full sweep with control of the executive, legislative, and judicial branches of the US Government. There is still some uncertainty around this, with Democrats holding out hope that they might wrest control of the House, which would give them much greater ability to constrain a Trump 2.0 administration.
We apply an objective constraints-based approach to parse through the noise and focus on the key constraints facing the likely new US administration.
We appreciate that there are strong personal and political reactions to these events in the US and around the world, as well as potentially significant impacts on social matters and broader cohesion within the US. We cannot ignore these impacts, but we also acknowledge our duty to best steward our clients’ capital with a steady eye on long-term objectives.
To help moderate these emotions and stay disciplined, we utilise a constraints-based approach to political and geo-political analysis. Popularised by Marko Papic from BCA Research, this framework looks beyond policymaker preferences (i.e., what they say) and focuses on the material constraints that determine what they can actually do. Of course, policymakers are only human and can make mistakes, either by not being aware of their constraints or by wilfully ignoring them. However, policymakers that test their constraints usually find the limit very quickly, as former UK Prime Minister Liz Truss discovered in 2022 when she tried to pass a major package of unfunded tax cuts into a sceptical bond market.
Importantly, despite what TV shows like House of Cards or The West Wing might imply, the president is not an all-powerful head of state and faces numerous constitutional and practical checks and balances. This is true of all US presidents past, present and future. Based on our analysis, we have identified the following key factors that are likely to constrain the actions of a potential Trump 2.0 administration:
Importantly, the president is not a king! We believe the bond market, Congress, and the grinding wheels of bureaucracy and procedural matters can act as constraints on Trump 2.0.
Trump pays a lot of attention to the performance of the US share market, which in itself may act as a soft constraint on his actions (i.e., he may respond to a sharp decline in US equity prices). However, we believe our example of Liz Truss is much more pertinent for investors. We have strong conviction that the bond market will play a key role in constraining Trump 2.0 policies and will punish fiscal profligacy.
In fact, we would go so far as to call the bond market the fulcrum, or pivotal, constraint on the next US president. After all, the term ‘bond vigilante’ originated in the 1980s, when bond market traders sold US Treasuries in protest against an overly dovish Fed and loose fiscal policy. They returned to force similar fiscal restraint on a young Clinton administration in the 1990s, and most recently ended the shortest reign for a UK Prime Minister when they punished Liz Truss’ ‘mini budget’ in 2022.
Of course, the US does have the privilege of being the global reserve currency, which does grant it significantly more leeway than other nations. However, even the global hegemon has a limit, and while we don’t know exactly when the bond market will spur into action, we do know that there is no escaping its punishing authority. If bond vigilantes push the 10-year US Treasury yield to 6% or 7%, they will very likely drive the US (and global) economy into recession.
Before that happens though, we strongly believe that even Donald Trump would have to bow to their demands and change course on whatever policy (missteps or otherwise) triggered their wrath (whether it be on tax cuts, tariffs, trade wars, immigration, or Fed independence). We would also add that bond yields tend to behave as self-correcting constraints. There is only so high the 10-year US Treasury yield can go before it forces a cyclical recession that then pulls it back down.
In an extreme case, we could potentially see financial repression where the Fed is compelled to manage interest rates via yield curve control, but even in that scenario, bond market pressures would simply emerge in the foreign exchange market, via a (potentially sharp) depreciation of the US dollar. In other words, there is no escaping the long arm of the bond market.
This year’s congressional elections truly are just as important as the presidential ones. Final results may take weeks to certify, but we are likely to have a Republican Senate and may very well have a Republican House. This is important because Congress controls the US budget and has sole authority to pass actual legislation, which would be required for any potential tax cuts. A full sweep theoretically gives Trump greater leeway to pursue his priorities, but we still believe that a Republican Congress will exercise a modicum of control, if only to limit the most extreme presidential actions. We note that a Republican Senate has rejected extreme nominees to the Fed in Trump’s first term.
On the other hand, if Democrats do manage to win the House of Representatives, they will be able to significantly curtail the extent of any fiscal largesse or executive over-reach from the president.
Legal challenges are likely to abound over the next four years as Trump opponents utilise all means necessary to thwart him. On this note, we appreciate that he has stacked the judicial branch in his favour (including at the Supreme Court), which may limit this avenue of constraint. That said, the Supreme Court’s Chevron deference ruling from July 2024 remains broadly untested and may yet be used to try and challenge federal agency actions.
In addition, while markets are reacting to fears of widespread tariffs and trade wars, we would note that unless Trump declares a national emergency (which he may well do), he would generally have to rely on the familiar route of Section 232 or Section 301 investigations before implementing new tariffs. These investigations may take months to conclude, offering time for potential negotiations or side-deals, as occurred during his first term.
Finally, don’t underestimate the ability for the federal bureaucracy to slow the wheels of progress (or tyranny). There are also practical limitations to what even the most ardent presidents can implement. On the matter of immigration, for example, it would be practically impossible to requisition the National Guard to round up and deport millions of immigrants on day one.
These constraints are likely to influence the most investment-relevant implications of Trump 2.0.
Noting that there is still a high level of uncertainty still at play around the final congressional results, our constraints-based assessment leads us to focus on the following key investment-relevant implications investors should prepare for:
Investors can generally expect a focus on tax cuts, immigration, tariffs, and trade tensions (as a means to an end), deregulation, and potential short- term geo-political volatility.
On balance, these factors point to a world with higher nominal US growth, higher inflation, and positive domestic tailwinds for US corporate earnings, balanced by the potential negative global growth implications of trade tensions and geo-political volatility. These are broadly in line with our pre-existing secular views that are already baked into our long-term investment strategy frameworks (we discussed these views in more detail in our Observations piece Asset allocation in a changing world).
We would also caution investors from projecting these implications too far in one direction. As we have noted, material constraints moderate policy decisions when they are respected and force policy corrections if they are violated. To reiterate our bond market example, bond yields seldom rise indefinitely—they normally hit a point where they cause a recession and self-correct lower (with a recession also driving inflation cyclically lower). Thus, while we are cautious on US Treasuries, we would not be indiscriminate sellers.
While there are numerous attempts to quantify the implications of Trump 2.0, we would also caution against relying too much on these initial estimates, and investors will likely only get clarity once we have a clearer idea of the make-up of both the executive and legislative branches of the new US Government.
Astute investors would do well not to over-react to headline noise, particularly around tariffs and geo- politics.
Markets and investors have shown particular concern about the potential stagflationary impacts of Trump’s threatened tariff proposals, which include 60% tariffs on all Chinese imports to the US and 10- 20% across-the-board tariffs on all imports to the US. To be fair, we would expect near-term volatility if these threats come to pass, with negative implications for Chinese- and global trade-related assets.
Europe is unlikely to behave passively confronted by new US tariffs. However, investors should recognise that these are ’opening gambits’, and form part of a broader negotiating strategy to achieve an already- stated goal of increasing foreign direct investment (FDI) and manufacturing activities in the US.
While unfamiliar to investors who are used to the post-Cold War US-led hegemony, these actions are not out of the ordinary in international relations—prior US administrations have used tariffs or the threat of tariffs to achieve broader economic goals. As Marko Papic from BCA Research has noted, Richard Nixon famously implemented 10% across-the-board tariffs in 1971 to compel trading partners to agree to devalue the US dollar on the way to eventually abandoning the Bretton Woods global monetary system. In the 1980s, Ronald Reagan threatened the use of tariffs as part of the lead-up to the 1985 Plaza Accord, again devaluing the US dollar. The take-away is that tariffs are used or threatened as a means to an end, not as an end in themselves.
With that view in mind, US trading partners, including China, have a clear decision to make—how do they want to approach negotiations with Trump 2.0, given his current stated demands for increasing FDI and manufacturing more products in the US?
On this front, we would also highlight the deft manner in which Australian officials navigated 2018’s US trade tensions. Through astute and pragmatic actions, Prime Minister Malcolm Turnbull and Australia’s own Department of Foreign Affairs and Trade (DFAT) managed to secure permanent exemptions from Trump’s 25% steel and aluminium tariffs. To this day, we are the only jurisdiction alongside South Korea to enjoy these permanent exemptions. Alongside our membership of the AUKUS and Five Eyes alliances, this should put Australia in a strong position to navigate any potential trade tensions in 2025 or beyond.
Regardless of who wins, the world is already progressing towards a multi-polar state, with more and diverse actors on the world stage. This is a core component of our secular outlook, and is already embedded into the strategic and tactical advice we provide to our clients. While there will doubtless be increased headline and ‘tweet’ risks in a second Trump term, we will steadfastly maintain our prudent and objective constraints-based approach to assessing geo-political uncertainty, and its implications for investment portfolios going forward.
Instead, look to what the president-elect is trying to achieve, and recognise that the world we’re in is unfortunately growing more complicated.
For a presidential election year, the current three-month S&P 500 Index return (+12.5%) is the strongest in nearly a century, and the year-to-date return is the third highest on record (previous high in 1936) at
~22%. While presidential elections are considered consequential, given their influence over economic, healthcare, national security, and climate change policy, equity market returns through presidential terms tend to be positive, with only three notable exceptions since 1932: both of the Bush terms (2001- 2004 and 2005-2008) and Nixon (1973-1974).
In the lead up to the election, various markets had a decidedly ‘Trump’ bias to them—the US dollar has its 13th largest monthly gain in 20 years (+3.2%), US 10-year bond yields recorded their eighth largest increase in 20 years (+50 basis points), and US equities strongly outperformed global equities. In isolation, any of these moves may have been considered idiosyncratic, but when viewed together, it's reasonable to suggest that markets were not only braced for a Trump presidency, but they were also braced for a Republican sweep.
At least initially, we continue to prefer US, domestic, and Japanese equities, and mid and small- cap companies.
Although cross-asset moves suggested a Trump presidency, equity market internals have been mixed and complicated by recent third-quarter earnings results. Favoured sectors, such as financials for example, gained 2.5% in October. However, energy, another likely beneficiary of a Trump presidency, was up only modestly. The Value Index fell 1.4% and underperformed the Growth Index. Consequently, we feel market moves of note are more likely to be seen in the US dollar, interest rate markets, and global equities, than they are in US equities. From a positioning perspective, investors have been positioned strongly in US equity markets, suggesting a defensive bias into the election (on balance, global investors are net short developed markets ex-US). It’s quite likely that many of these trades have already been priced and, at the margin, unwind slightly over the rest of the year. A ‘red-sweep’ scenario will be viewed as the most positive for risk into year-end on prospects of pro-growth policies and deregulation across industries (e.g., banks, industrials, transportation and energy). This is because upside potential is generally priced in first. Uncertainty around policy execution will likely become more prominent in 2025. A red-sweep outcome should be more aligned with value and domestic sectors (especially if the Fed continues to ease into a resilient economy).
Under this scenario, we expect the largest impact to be from broadening equity leadership, amplified if the Fed continues to ease into an economic backdrop that is anchored by a still healthy economy.
However, equity timing might be complex, given a potentially greater sensitivity in bond and FX markets this time versus 2016. Amidst a positive set-up for equities into year-end, one of the key concerns is how interest rates evolve.
A global equity strategy for Trump is premised on a stronger dollar, rising rates, trade policy uncertainty, and a value rotation. In relative terms, this favours the US over the rest of the world. Globally, the UK is likely to outperform Europe, and emerging markets are potential underperformers, contingent, of course, on Chinese policy direction.
Regionally, Japan and Australia remain preferred exposures, although we note that valuation dynamics are becoming more challenged in Australia. Nonetheless, the direction of fiscal policy emanating from China’s National Party Congress (NPC), delayed until after the election, is a key driver of our constructive stance for now. Although US dollar / Japanese yen volatility and political uncertainty has resulted in lacklustre returns for Japan over recent months, our overweight stance is rooted in the long-term structural tailwinds associated with strengthening corporate governance outcomes that result in superior financial returns and ultimately improved valuations. Our overweight US equity stance was, in part, predicated upon a Trump victory and what that means for tariffs, corporate taxes, and deregulation.
Mid-cap and small-cap equities stand to benefit from any changes to taxation. The Tax Cuts and Jobs Act (TCJA) brought the US statutory corporate tax rate in line with the global average and has been one of the largest drivers of improved returns since 2017. US domestic-orientated companies have higher tax rates and would see the biggest move in taxes with a statutory rate change. US multi-nationals would also see some change but are somewhat more insulated. At the sector level, communication services and consumer discretionary sectors earn the greatest percentage of pre-tax income in the US, leaving them more exposed to statutory rate changes. Technology and healthcare had their earnings roughly split 50/50 between the US and abroad. However, their earnings can be mobilised across jurisdictions via intellectual property transfers and other tax mechanisms.
Although equities are likely to react to a Trump presidency and/or Republican sweep positively, it potentially comes with a sting in the tail if it is accompanied by increased inflationary implications and, consequently, higher bond yields. Break-evens have moved sharply higher over the past month, and investors have removed approximately two rate cuts from their forecasts (3.75% Fed funds at the end of 2025 from around 3.25%).
Within fixed income, we are cautious on global government bond exposures.
Within fixed income, we are primarily concerned with the upward pressures on US Treasury yields, whether from increased term premia due to rising budget deficits, higher real rates from increased economic growth and potentially higher cash rates, or higher inflation expectations. As such, we are generally cautious on global government bond exposures, and prefer to access duration through Australian government bonds or investment grade credit, with a preference for the belly of the curve, which is less exposed to higher term or inflation premia (i.e., in the three to seven-year range).
We believe high quality alternative assets should continue to play a valuable role in investors’ portfolios.
Alternative assets should provide investors with a valuable source of portfolio diversification and volatility reduction, by virtue of their exposures to more idiosyncratic risk and return premia not generally available in public markets. Within this space, we maintain our preference for infrastructure exposures that provide inflation protection and exposure to structural growth themes, well-managed private debt exposures, and uncorrelated strategies, like hedge funds and other diversifiers (such as royalties, insurance, and litigation exposures).
We encourage investors to apply a similar objective framework to assessing the outlook.
Most importantly, as we wrote about in our July 2024 Special report How investors should approach recent Transatlantic political volatility, do not panic. We continue to encourage investors to parse through the noise and think through the facts by using a disciplined, objective framework, as we have outlined above. Having taken all these factors into account, we remain broadly comfortable with our current strategic and tactical asset allocations. That said, we acknowledge that we are at an inflection point against the political, geo-political, and macro backdrop, and stand ready to make adjustments if and when our assessments change.
As part of our 2024 investment strategy review, we have already positioned our strategic asset allocations for a higher growth, higher inflation, and a more volatile world. This includes an uplift to our (already significant) allocation to alternative assets, particularly in areas like infrastructure that are keyed into secular growth thematics, regardless of who occupies the White House. We have also increased our preference for global equities, and re-emphasised our preference for high quality active managers, who have the skills and expertise to navigate an increasingly uncertain world.
On a tactical timeframe, we are overweight equities, as we see supportive fundamentals and a central bank easing cycle that should underpin corporate sector performance. Within this, we are overweight the US (which may benefit from tax cuts and deregulation, and provide a hedge from trade tensions), Australia (which is keyed into potential Chinese stimulus and is also well-placed to weather trade tensions), and Japan (where we continue to see supportive secular drivers on corporate governance). We are also underweight global government bonds on the expectation of upward pressures on US Treasury yields, and we are overweight foreign currency as a hedge against recession and trade risks.
Importantly, don’t lose sight of the (still supportive) macro and policy backdrops.
Amongst all the political excitement, we reiterate again that investors should not lose track of the macro-economic fundamentals. They still matter for markets, and our firm belief is that they still matter more for markets on a six- to 12-month timeframe than political or geo-political shocks. Our assessment of these continues to be broadly supportive: US economic growth is moderating but resilient, and inflation is no longer a concern for most global central banks, allowing them to embed a modest rate- cutting cycle that should support growth. In addition, Chinese policymakers are likely to announce further stimulus measures this week (and in coming weeks or months). While there are question marks around the quantum and economic effectiveness of these, there can be little doubt that the policy stance in the Middle Kingdom has pivoted firmly to supportive mode.
We have spent the best part of a year refreshing our secular investment outlook and enhancing our investment strategy processes to prepare for the more uncertain world we believe we are entering, which includes an era of more political and geo-political volatility. These views (and the actions summarised above) are already embedded into the strategic advice that we provide to our clients.
The votes are in for the centrepiece of the ‘year of the election’, and Donald Trump is set to be the 47th President of the United States, though the final tallies for the US congressional elections may take longer to confirm. While we await the final results, we continue to apply a constraints-based approach to assessing the likely policy priorities and investment implications of the next US administration.
Having outlined our assessment and positioning in regard to these, we re-iterate that in a more uncertain world, we are maintaining a flexible and nimble approach to our tactical asset allocation, and stand ready and willing to shift our positioning in response to the evolving risks and opportunities across financial markets.
This document has been prepared by LGT Crestone Wealth Management Limited (ABN 50 005 311 937, AFS Licence No. 231127) (LGT Crestone Wealth Management). The information contained in this document is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence a person in making a decision in relation to any financial product. To the extent that advice is provided in this document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of a financial product, you should obtain and consider a Product Disclosure Statement (PDS) or other disclosure document relating to the financial product before making any decision about whether to acquire it.
Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, LGT Crestone Wealth Management and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.
LGT Crestone Wealth Management, its associated entities, and any of its or their officers, employees and agents (LGT Crestone Group) may receive commissions and distribution fees relating to any financial products referred to in this document. The LGT Crestone Group may also hold, or have held, interests in any such financial products and may at any time make purchases or sales in them as principal or agent. The LGT Crestone Group may have, or may have had in the past, a relationship with the issuers of financial products referred to in this document. To the extent possible, the LGT Crestone Group accepts no liability for any loss or damage relating to any use or reliance on the information in this document.
Credit ratings contained in this report may be issued by credit rating agencies that are only authorised to provide credit ratings to persons classified as ‘wholesale clients’ under the Corporations Act 2001 (Cth) (Corporations Act). Accordingly, credit ratings in this report are not intended to be used or relied upon by persons who are classified as ‘retail clients’ under the Corporations Act. A credit rating expresses the opinion of the relevant credit rating agency on the relative ability of an entity to meet its financial commitments, in particular its debt obligations, and the likelihood of loss in the event of a default by that entity. There are various limitations associated with the use of credit ratings, for example, they do not directly address any risk other than credit risk, are based on information which may be unaudited, incomplete or misleading and are inherently forward-looking and include assumptions and predictions about future events. Credit ratings should not be considered statements of fact nor recommendations to buy, hold, or sell any financial product or make any other investment decisions.
This document has been authorised for distribution in Australia only. It is intended for the use of LGT Crestone Wealth Management clients and may not be distributed or reproduced without consent. © LGT Crestone Wealth Management Limited 2024.
