Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.
In this edition, we explore the immediate aftermath of Trump’s unexpected victory and the profound impact it’s having on the markets. From rising stock prices to shifting sector dynamics, the market is reacting in ways that could change the trajectory of your investments.
But with potential risks like rising volatility and policy shifts, there’s much to consider before making your next move.
Will the market continue to rally, or are there storm clouds ahead?
Today at a glance:
- Market’s Response to Trump’s Return
1.1 Immediate Reactions in Markets
1.2 Surprises & Divergences Across Asset Classes
1.3 The “Reflation” Narrative: Could it Continue?
1.4 Next Steps: Portfolio Strategy Considerations - How Do You Decide How Many Stocks to Buy?
1. Market’s Response to Trump’s Return
In the wake of Donald Trump’s recent U.S. presidential election victory, the financial markets have responded decisively. U.S. stocks, bond yields, and the U.S. dollar saw sharp increases, and the immediate question is whether these shifts will have long-lasting impacts.
For a deeper dive into the topic, let’s explore the potential outcomes and the challenges this election could bring, offering valuable insights into what investors and markets can expect moving forward, as per Goldman Sachs.
1.1 Immediate Reactions in Markets
As anticipated, Trump’s win has ignited some notable moves, similar to those seen after the 2016 election, particularly in areas such as banking, technology, and energy.
According to Brian Garrett, head of equity execution at Goldman Sachs, investors came into the election somewhat underweight in risk exposure.
Following Trump’s victory, many are revisiting trades that performed well during his previous presidency, including strong positions in sectors likely to benefit from deregulation and favorable tax policies.
For example, following Trump’s 2016 election, U.S. equity markets rallied by about 5.5% from mid-November to mid-December.
Garrett suggests that a similar surge could unfold this year, with the S&P potentially reaching around 6,100 if the market follows this historical playbook.
However, it is questionable if 2024’s dynamics are truly comparable to 2016, noting that expectations for a Trump win were already priced in by some market participants, potentially limiting further upside.
1.2 Surprises & Divergences Across Asset Classes
There have been some surprising market reactions post-election, especially in the renewable energy sector.
Stocks in renewable energy companies have suffered significant declines due to concerns about potential changes to the Inflation Reduction Act (IRA).
Some renewable companies have seen drops of up to 20% in share prices, reflecting investor fears about rollbacks in green subsidies and the impact on future earnings.
Another unexpected development has been the rapid drop in volatility, measured by the VIX. Unlike the prolonged market uncertainty experienced during the 2020 election, the markets quickly priced in Trump’s victory, resulting in one of the sharpest two-day drops in the VIX over the past decade. This suggests a level of market confidence and a swift transition to a “risk-on” sentiment.
1.3 The “Reflation” Narrative: Could it Continue?
Current conditions are often described as somewhat reflationary. In a reflation scenario, equities typically rally while bond prices fall.
However, certain indicators, such as commodity prices, are not behaving as expected, partly due to a strong U.S. dollar and potential uncertainties surrounding trade relations with China.
Unlike in 2016, when global equity markets broadly rallied, European equities have shown less enthusiasm, highlighting potential geopolitical uncertainties.
Interest rates have also become a focal point, with the 10-year Treasury yield jumping by 20 basis points. This underscores expectations for higher interest rates and inflation under Trump’s economic agenda. Although rates volatility remains elevated, currency markets are responding more slowly.
Both markets, particularly rates, continue to show cautious optimism but seem more hesitant than equities in fully embracing a “reflation reset.”
1.4 Next Steps: Portfolio Strategy Considerations
Given the unique market dynamics in 2024, investors may want to reconsider their portfolio strategies to strike the right balance between risk-taking and hedging.
The evolving landscape, marked by shifts in volatility, economic policies, and expectations around interest rates, requires a careful approach. Here’s a breakdown of what investors should consider moving forward:
1.4.1 Equity and Volatility Outlook
Equities are primed for further upside, especially as many investors remain under-positioned in risk assets.
As the market rallies, more capital is likely to flow into stocks, which could push prices higher.
This “chasing of call options” by investors may increase volatility, particularly if the market continues on its upward trajectory.
However, Goldman Sachs cautions that volatility could return if economic uncertainties rise. Geopolitical tensions or policy shifts under the new administration could reignite concerns, particularly in areas directly impacted by changes in economic and foreign policies.
Thus, while the short-term outlook for equities remains positive, risks persist. Volatility may pick up, especially if policy shifts lead to destabilizing events.
1.4.2 Sector-Specific Plays Post-Election
The recent election results have created opportunities in certain sectors that could benefit from a potential Republican sweep. These sectors include:
- BANKS: The financial sector stands to gain, especially with potential tax cuts and deregulation. A few notable U.S. Bank Sector Indexes include KBW Bank Index (BKX), S&P 500 Financials Sector Index – (SPSY), and NYSE Arca Bank Index (BKX).
- TECHNOLOGY: Tech stocks may continue to grow, benefiting from innovation and favorable policy environments. A few notable U.S. Technology Sector Indexes include NASDAQ-100 Index (NDX), S&P 500 Information Technology Sector Index (S5INFT), and NYSE Technology Index (NYT).
- ENERGY: Energy stocks, particularly those in fossil fuels, could see gains due to reduced regulatory oversight. A few notable U.S. Energy Sector Indexes include S&P 500 Energy Sector Index (SPNY), NYSE Arca Oil & Gas Index (XOI), and Energy Select Sector SPDR Fund (XLE).
However, the election results also bring risks for certain sectors. Renewable energy, utilities, and industries reliant on regulatory policies or subsidies might face increased uncertainty, particularly if subsidies or support are scaled back under the new administration.
1.4.3 Global Diversification
For those considering international exposure, there has been a noticeable shift in allocation strategies. U.S. equities remain a key focus, with favorable conditions in the domestic market. Additionally, Asia is becoming increasingly attractive due to favorable fiscal stimulus and attractive valuations.
Conversely, Europe presents challenges, with geopolitical risks and a slower growth trajectory. As a result, European equities and high-yield bonds are underweighted, while Japan maintains a neutral stance, as equities there have performed well, largely driven by the strength of the U.S. dollar.
1.4.4 Strategic Takeaways
- Stay Overweight on U.S. Equities: Despite potential concerns, the U.S. economy remains resilient, and the technology sector is expected to continue outperforming. U.S. equities thus remain a solid choice for investors.
- Tactical Shifts in Asia: Asia continues to look attractive due to favorable fiscal policies, although political risk must be considered. An overweight position in Asia (excluding Japan) could serve as a good hedge against potential volatility in Europe.
- Avoid Europe for Now: Given the economic pressure on European countries and the risks associated with trade tariffs and policy uncertainty, it is advisable to underweight European equities and credit.
- Sector Rotation: Focus on sectors that are likely to benefit from the current political and economic environment. Banks, energy, and technology stocks are positioned for growth, while renewable energy and utilities could face challenges.
By strategically positioning portfolios to focus on sectors likely to benefit from the ongoing trends, investors can better navigate the uncertainties of the coming months. Adjusting exposure based on both regional risks and sector-specific opportunities will be key to managing risk while capitalizing on growth.
2. How Do You Decide How Many Stocks to Buy?
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