Trump’s victory boosts US markets

In our regular monthly update, Richard Flax, CIO at Moneyfarm, walks you through the key events that have impacted the markets over the past month – the UK Budget and the US elections. In this video, Richard highlights how policy decisions and political developments continue to drive financial markets.

Let’s start with the UK budget. The government had telegraphed its intentions pretty clearly. Public services weren’t working. Higher taxes would be needed to support higher government spending, as a precursor to stronger economic growth in the future – or so the government hopes. And that was basically the Budget we got. Taxes as a percentage of the overall economy are forecast to reach their highest level since the 1940s. Some of that will be spent in investment, on things like infrastructure, but a lot of the additional revenue will go on current spending, notably public sector wages.

So it was a bit disappointing, but maybe not that surprising, to see that forecasts for economic growth over the next five years, from the independent Office for Budget Responsibility (the OBR), barely shifted. Forecasts of growth of between 1 and 1.5% per year won’t be enough to generate the sort of prosperity that the government is looking for. 

There are a few points to make here. First, this situation is not unique to the UK – lots of developed economies face similar challenges as their populations are ageing. And it’s positive to see the government trying to address these challenges, while trying to keep a tight rein on government debt levels.

But we think that the Chancellor is correct when she says that economic growth is the answer. She might even be right to suggest that you need to have increased public investment and better public services to help accelerate growth, but higher taxes aren’t generally associated with stronger economic growth and the OBR forecasts suggest that faster growth is still some way off. 

Let’s turn now to the US election. The consensus view was that it would be a tight race for the presidency – too close to call, said most pundits. As it turned out, the consensus was wrong. The Republicans won the presidency comfortably – even winning the popular vote for the first time since 2004, they regained control of the Senate and kept their majority in the House of Representatives. We should expect them to move swiftly to implement their agenda.

So, what are the things we should look out for. First, there’s trade. The President-elect has been pretty clear that he wants to raise tariffs, even if it’s not yet clear how big the increases will be.

Then there’s immigration. The new administration looks set to deport illegal immigrants on a large scale.

Finally there are taxes and regulations. Here, the administration will look to cut taxes, or renew tax cuts that might expire, and try to reduce regulations. 

The impact of all these things is tough to measure, but we can make a few general points. First, companies, and equity markets, usually look favourably on lower taxes and red tape. And we’ve seen some positive reaction in the US equity market since the election result. The impact of higher tariffs might be less positive. Some domestic companies could benefit, as their foreign competitors face higher costs, but it’s likely that consumers could see higher prices as a result. Fewer immigrants could mean a smaller workforce, in an economy where the labour market is still pretty decent, even after interest rate hikes. With rates now coming down, tighter controls on immigration could prompt higher wage growth – good news for workers, maybe less good for companies and for inflation.

So, the early policies from the new administration might prompt stronger US growth, but also higher inflation. If that’s right, it’ll create some challenges for US central bankers, who may have less room to cut interest rates than they’d thought a month ago.

From a markets perspective, we think that the events of the past couple of weeks have been generally favourable for US equities and perhaps less positive for US government bonds – and we’ve maintained or in some cases increased our US equity exposure in our most recent rebalances. We’ll need to keep a close eye on the trade situation to see how the new US administration implements its tariff agenda and how its trade partners respond. We think higher tariffs increase the risk of a slowdown in global growth, even if US companies might be better placed to weather that than some of their global peers.