The US election is over, proving the pollsters disastrously wrong and the mid-to-late October betting odds predicting a strong Republican victory remarkably right. The result comes as a shock as many were misled by sudden changes in Kamala Harris’ winning odds just ahead of the election.
And rather than the nail-biting, closely contested election that so many feared would be the case based on the extremely tight polls up to election day, we instead have a clear and resounding victory for Donald Trump and the Republican party, which will control both houses of Congress.
Below, we consider three major implications of Trump 2.0 as we attempt to assess the full impact of this historic event on global financial markets and on world history in general.
Trump 2.0: The largest US political revolution since Ronald Reagan
As Lenin said: “There are decades where nothing happens; and there are weeks where decades happen.”
Trump’s resounding victory amounted to a political revolution that was a stinging rejection of the establishment and gives the Republicans a potent political mandate. It will mean enormous changes and possibly even a wholesale reshaping of the US and global economy.
But first, a brief look at a big winner and a big loser in the wake of the election.
Performance of JP Morgan (red) and Denmark’s Vestas Wind Systems (blue)
Source: Saxo; US election day, 5 Nov 2024, is marked with a vertical dotted line.
The election brought a sharp reaction in global markets, with US stocks rallying sharply. Small-caps outperformed because small, domestically oriented US companies will get the most out of any new tax reforms and could enjoy protection from foreign competition via Trump’s tariffs.
Performing even better than the US small-cap stock indices, which jumped around 6% the day after the election last week, were the major banks and financial services companies. JP Morgan, the largest US bank, jumped more than 11% last Wednesday on the election result, adding more than $60bn to the company’s value.
Investors swarmed into banks because of Trump’s stance against regulation. He is expected to reduce corporate taxes and, just as importantly, to unwind some of the post-global financial crisis regulations and other planned regulations on banks, freeing up more of their capital that could increase their profitability, although that would also raise their risk levels.
Elsewhere, many non-US equity markets put in mixed results at best after the election, with European markets some of the weakest on the combination of fears for European security under a Trump presidency and the impact on exports from those same tariffs.
Also performing poorly were any US-exposed stocks in the alternative energy space. Danish wind turbine maker Vestas, which is shown in the chart above, was blasted lower the day after the election last week as investors know that a Trump 2.0 administration will see the US pulling out of the Paris climate agreement and likely removing nearly every subsidy for wind and other alternative energy sources.
Trump 2.0: Three major implications
A revolution means enormous scope to shape policy
This was by far the most significant political revolution since the election of Ronald Reagan in 1980, when Reagan slashed taxes and started a massive deregulation push, one that peaked later in Bill Clinton’s presidency, when his treasury secretary supercharged the big US banks’ aggressive risk-taking by orchestrating the unwinding of the Depression-era Glass-Steagall Act.
What the second election of Trump might bring is not fully clear, but an overwhelming victory for a totally anti-establishment party means that Trump has the mandate, should his team prove skilful enough in using it, to completely transform US government. This means everything from slashing spending and reducing taxes to enacting new widespread deregulation measures and of course, imposing massive tariffs that disrupt the globalised economy.
In relations with other nations, Trump will enjoy the immense power that a US president has always had in foreign relations.
It’s important to point out that Trump 2.0 will look very different from Trump 1.0. In his first administration, he had no political experience, got less of the popular vote than Hillary Clinton and chose many establishment figures for key posts who told him what he could and could not do. There were notable policy moves but also plenty of noise and confusion in his policy-making.
He has learned from that experience and has a vastly more experienced and professional team this time around, one that is more consistently anti-establishment. He also has access to powerful billionaires offering their ‘services’ for shaping policy.
The market has reacted, but things don’t move in a straight line
Ahead of the election, many had sketched out scenarios of how the market would react in the event of a Trump 2.0 outcome. The initial reaction largely proved them right: equities celebrated, small-caps and bank stocks roared higher, the US dollar rose sharply and US treasury yields remain quite high, all on the assumption that we’ll see a rip-roaring US economy on Trump's pro-business agenda.
But will it be so simple? What if we have Trump moving quickly on tariffs, which are inflationary and bad for growth, and slower or not at all on corporate tax cuts because some in Congress are concerned that the US can’t afford even larger budget deficits?
What if US treasury markets rebel at Trump’s intended policies and interest rates spike higher, which slows the economy as credit markets seize up?
In short, there are many dynamics at work that could move markets in both directions and investors should take a careful approach when we don’t yet know what the famed ‘first 100 days’ of a new presidency will – and won’t – bring.
This election will echo around the globe
The US is the world’s largest economy and shifts in demand from American consumers are felt far and wide, as are any moves in its stock and bond markets – both by far the world’s largest.
On the economic front, Trump tariffs have the potential to impact global inflation (higher for the US, possibly lower elsewhere) and global economic growth. And if Trump’s policies continue to send US treasury yields and the US dollar spiking higher, that will tighten global financial conditions as well.
On top of that, there are the traditional direct geopolitical impacts from a US president, who enjoys considerable freedom in foreign policy moves. The war in Ukraine and the Middle East are the most urgent issues where Trump’s decisions will have a huge impact, as will whether he singles out China for especially large tariffs.
Would China retaliate or try to convince Trump to make some kind of deal that somehow makes him look good but avoids the worst of the feared impacts?
All in all, this Trump 2.0 scenario brings the maximum potential for US policy to change the rules for the global economy and geopolitics because of Trump’s powerful mandate and because he goes against much of the traditional neo-conservative agenda of the Joe Biden administration.
John Hardy is Saxo’s chief macro strategist. The views expressed above should not be taken as investment advice.