One week / one topic: Let the dust settle

What happened?

The US election results delivered a red sweep, with Republicans winning the presidency and (almost certainly) controlling both the Senate and the House.

Given the large margin of victory, voters have arguably given Trump a clean mandate for de-regulation, lower taxation, tariffs and an immigration crackdown.

While polls were painting a picture of very narrow margins, market expectations were largely on side. So, what was the price reaction?

Comparing performance for the last month leading up to the election vs what happened in the two days after the event, we can make a number of observations.

Within equities, US indices largely followed through with similar moves as before the election – while China, Japan, and EM all did noticeably better.

While there are clearly other factors at play – upcoming headlines from China are clearly in focus – the optimism about US equities continues unabashedly.

(Past performance is not a guide to future performance.)

Across bonds and FX, the Mexican peso did much better than expected as many investors were positioned for an immediate, tariffs-related gap move which ultimately didn’t materialize.

The Euro visibly underperformed as macro developments matched the election results, and the potential for a clear divergence between the Fed and the ECB really stands out at the moment.

Finally, commodities saw a sharp retracement in gold – which nonetheless remains in a raging bull market – while Bitcoin meaningfully extended its Trump-fueled rally.

As things stand, how should investors interpret this new information?

How to capitalize on this?

Our observations

• Fundamentals: It is debatable how much political decisions can affect economic fundamentals. That said, there is a growing consensus that US inflation might well start rising again and force the Fed to reverse course.

• Price action: Trump’s first term was expected to favor Energy companies (“Drill baby drill”) and Banks (deregulation). Reality turned out to be quite different… Caveat emptor.

• Investor beliefs: It feels like the market focus was on FX as the cleanest way to express election-related views, which in turn speaks of heightened concerns about tariffs. Too early to say whether this was justified, but something to observe nonetheless at this early stage.

So what?

While we did not pre-position portfolios going into the event, we should once again underscore the importance of diversification and robust asset allocation even in the context of such a short time frame.

To some extent, politics usually don’t matter much for markets… until they do, of course.

Therefore, maintaining a stance of ‘patient opportunism’ seems appropriate while we retain our constructive positioning in light of a favorable fiscal, monetary and liquidity backdrop.