“Donald Trump’s election victory provided an immediate boost to a broad range of investments,” says Dan Coatsworth, investment analyst at AJ Bell.
“The major US and European stock markets all traded higher on the election result, bitcoin hit a new record high and the dollar strengthened. The losers included gold, renewable energy companies and Chinese shares.
“The election was too close to call in the run-up to the final day of voting so many investors waited until we had clarity over the winner to reposition portfolios. That’s why we saw so much activity as soon as Trump declared he had won.
“There is a lot to consider under the return of a Trump administration and what’s worked for investors immediately after the election may not remain that way over the longer term.”
Key things for investors to consider
“Trump went big on the economy and immigration in his campaign. His desire to cut corporation tax from 21% to 15% for companies that make their products in the US was music to the ears of business leaders.
“Lower taxes mean more money left in companies’ pockets – either to reinvest, use to buy back shares or to pay out as dividends. A boost to post-tax earnings would in theory feed through to a higher share price. Greater confidence among corporates could see them invest more money to support their growth and that could feed into the economy. On paper, it all seems straightforward, but things are never that simple.
“This theory falls apart when you consider that Trump’s policies could fire up inflation. Imposing big tariffs on imported goods (Trump has proposed 60% tariffs on goods from China, up to 20% on the rest of the world) would significantly push up prices as the extra costs are passed onto the customer. That could hurt businesses which don’t have pricing power (i.e., cannot pass on costs without lowering demand) and it could hurt the consumer who is desperate for their monthly pay to not be gobbled up in a flash.
“A clamp-down on immigration could also lead to higher wage bills for many American companies if they no longer have a such a big pool of workers happy to accept low-paid jobs or do the work that many others don’t want to do.
“Trump’s previous term as president was associated with a strong run for the stock market whereas Biden’s term – and therefore Kamala Harris by default – was clouded by a period of high inflation and high interest rates, even though the stock market also delivered strong gains. That put Trump at an advantage in the election campaign as the cost-of-living crisis has created headaches for the public and they were looking for someone to find a solution.
“Many voters say they chose Trump because he was straight-talking and they remember the halcyon days when he was previously president. By voting him back into the White House, these individuals are hoping everything will return to how it previously was, with a lower cost-of-living at the heart of it all. But there is a real chance that Trump makes things worse, not better, when it comes to the fight against inflation.”
What’s going to happen to interest rates?
“Investors know all too well what happens when inflationary pressures remain high – it leads central banks to maintain or push up interest rates. That is the opposite of what equity markets have been pricing in. Shares have rallied since October 2023 in the belief that inflationary pressures were easing and interest rates would come down. Trump’s return could put things on a different path.
“While we could still see rate cuts in the near term, the Federal Reserve may not cut as hard and fast as previously thought if inflation strengthens once Trump gets back into power. That’s a major tailwind for equity markets and certainly not a backdrop that would normally support the kind of share price gains we’ve seen immediately after 2024’s election result.”
The impact of tariffs
“Tariffs present another problem, particularly for investors holding Chinese shares or funds. A lot of Chinese companies have made big money from selling goods into the US and now they face the prospect of smaller margins once factoring in tariffs and/or a big decline in demand if Trump successfully persuades Americans to buy from American companies. Europe could also be a loser from US tariffs.
“Those on the receiving end of tariffs won’t necessarily roll over and do as they are told. They will likely retaliate and that raises the risk of a severe trade war. An alternative is that Trump is simply trying to call their bluff. Threaten tariffs in the hope that foreign companies will invest more money in the US such as building new manufacturing facilities in North America and creating more jobs for Americans.
“Markets do not like trade wars and an escalation of tensions between the US and China or the EU could cause volatility among asset prices.”
What’s gone up in value since the election result?
Equity markets: “The main shares indices in Europe and the US have raced ahead.”
Dollar: “The dollar index – which measures the currency against major peers including the euro and yen – increased by 1.9%.”
Treasury yields: “The yield on 10-year US government bonds briefly hit 4.48% before easing back to 4.44% – still much higher than the 3.62% level seen in mid-September. That’s the market saying Trump’s policies are inflationary and so interest rates will have to stay higher for longer. While the yields have gone up, the price of US Treasuries has fallen.”
Defence stocks: “BAE Systems, Northrop Grumman and Booz Allen Hamilton were among the defence-related names in demand on the market following Trump’s election victory. Trump increased defence spending in his first term as president and would likely do the same again this time round.”
Oil stocks: “Trump loves using the slogan ‘Drill, baby, drill’ and his election win has given a spark to US oil producers on the stock market. Trump has talked about increased drilling on federal land and awarding more permits for LNG exports. Chevron and ExxonMobil were among the stocks rising as their industry backdrop should benefit from looser regulation, although any big uptick in output could cap progress for the oil price.”
Banking stocks: “US banks were in demand as the prospect of looser regulation, more economic activity, higher interest rates and more business investment all create a more vibrant backdrop for the sector.”
Bitcoin: “Trump promised to make America ‘the crypto capital of the planet’ and to build a strategic reserve of bitcoin. The cryptocurrency briefly hit $75,281 as the election results filtered through, and they maintained much of this strength as the day went on, hovering around $74,230.”
Two stocks to watch
US STOCK: Citigroup
“The Biden administration wanted the largest banks in the US to hold more capital in reserve, to cushion them against potential losses in the event of any setbacks.
“Those extra capital requirements may not be required under Trump, effectively meaning banks would have fewer constraints and be able to use more cash for lending or share buybacks.
“When you factor in the potential for looser regulations, lower corporate taxes potentially leading to higher business investment, and the prospect of interest rates staying higher for longer which is good for lenders, it’s easy to see why the outlook for the banking sector is more encouraging under Trump.
“Citigroup has interests in retail, commercial and investment banking, potentially making it well placed to benefit from any uplift in activity.”
UK STOCK: Ashtead
“Construction equipment rental group Ashtead is a perfect match for Trump’s vision of blue-collar workers earning a steady salary in America. A lot of people will have voted for Trump in the belief he is good for the jobs market, ensuring that construction and manufacturing businesses have better prospects.
“Ashtead rents out machinery and tools needed to build homes, offices and factories, while also supplying the equipment needed to fix what’s already there.
“Ashtead’s shares were weak over the summer and early September amid weakness in the local commercial construction market. Its longer-term prospects should improve under Trump and near-term there is a chance it could say that recent hurricane clean-up work has provided a welcome boost to earnings.”
