Stocks rallied on the news that Donald Trump had won the US presidential election but investors need to keep in mind that the actions of central banks often have a greater impact on markets than politics, says Invesco’s Kristina Hooper.
Hooper, chief global market strategist at Invesco, acknowledged that the very short term is likely to be dominated by politics, as investors buy into ‘Trump trades’ such as US small-caps, banks and energy stocks that are expected to benefit from the incoming president’s deregulation and ‘America First’ agenda.
However, she added: “Once you get past very short-term market reactions, I believe monetary policy matters more to markets.
“Yes, US stocks immediately had a jubilant reaction to the election, but those gains can be somewhat ephemeral — for example, we saw some retracing of the short-term stock market gains made right after the election in 2016.
“Yes, what seems likely to be a ‘red sweep’ of Republican leadership in the White House, Senate and House of Representatives will likely enable more of the Trump agenda to come to fruition, but the reality is that we don’t know the scope and timing of policy coming from the new administration. And that means we don’t know different policies’ impact on growth – and inflation.”
That said, Hooper expects the Trump trade to continue over the very near term. She is positive on risk assets in general but thinks US small- and mid-cap stocks are likely to benefit the most from any economic re-acceleration next year. They have the added advantage of being more attractively valued than their large- and mega-cap peers.
Many investors are positive on oil stocks given the Trump administration’s aim of increasing production. However, she argued that increased oil supply would push down the price, which would typically result in lower profit margins for oil companies. In fact, as Hooper noted, energy stocks underperformed clean energy stocks during the first Trump administration.
A more likely beneficiary could be financials, she added, given the potential for relatively quick deregulation in that sector under a new government.
“I think it’s important to stress the important role that central banks play for economies and markets. While 2024 elections have created policy changes in a number of countries, those changes are likely to play a very secondary role to monetary policy,” Hooper said.
“If new government policies result in higher inflation, central banks can recalibrate to counteract inflationary pressures. And, finally, central banks can be a stabilising force in times of de-stabilisation in markets.”
The Invesco chief global market strategist pointed to the Federal Reserve’s meeting last Thursday, where it cut interest rates by 25 basis points, as a reminder of the power of central banks.
In the meeting, Fed chair Jay Powell said he does not believe inflation expectations are becoming unanchored but the Fed would act quickly to re-anchor them if they did. He also said the Fed needs to continue recalibrating policy depending on the data, which reassured the market that it is not resting on its laurels in the battle with inflation.
Furthermore, Powell made clear the central bank would not pre-emptively adjust monetary policy to account for policies from the incoming Trump administration and confirmed that he would not resign if asked by Trump, giving investors the promise of continuity until his term expires in 2026.
“To illustrate the Fed’s power, US stock sectors that did not perform well immediately after the election performed better after the Fed decision,” Hooper finished.
“These were stock sectors that are more sensitive to higher interest rates, such as real estate, utilities and consumer discretionary; their performance improved after Powell’s relatively dovish comments on Thursday.”