Welcome, everyone, to this special election bulletin. It was prepared by one of our investment advisor teams, City National Rockdale, LLC.
Since the polls closed last night, we've been focused on the impact of the financial and economic landscape . With key battleground states like Pennsylvania, Wisconsin and Georgia called in Trump's favor, he secured a solid electoral victory and will become the 47th president of the United States.
In addition, Republicans have regained control of the Senate and are close to flipping the House, which would give them sweeping control of Congress.
We are relieved that there is a known outcome and that the markets can react with more certainty, given a clear shift in government control.
As the political landscape evolves, we're closely monitoring how these changes might shape markets and affect your portfolios.
So, let's start with the market reaction.
U.S. stocks are surging, especially as the Trump trade dynamic takes a deeper hold. Small cap stocks are seeing a particularly strong rally, reflecting expectations that a pro-business domestically focused policy agenda will boost companies with more U.S. exposure.
Large caps, while positive, are slightly less robust, as international growth and trade policy uncertainties do weigh on the global giants.
Key sectors likely to benefit include financials, energy and industrials, particularly companies in areas like steel and onshore energy production.
Banks are expected to gain from deregulation, while infrastructure spending promises a boost to materials and construction sectors. And within our portfolios, the financial sector is surging, with diversified banks leading the way.
That's followed by energy and consumer goods companies. And despite the potential for some fallout in tech, so far, it's performing well as a sector, rising north of 3% to start the day.
Moving on to bonds, we're seeing rising treasury yields as investors anticipate higher inflation and federal spending, which typically increases the government's borrowing needs. The 10-year yield has already climbed nearly 1% since mid-September. And this shift means a steeper yield curve, which favors banks and other financial institutions.
While the Fed's recent easing has helped keep borrowing costs manageable, Trump's win has prompted a reassessment, and we expect yields to stay elevated if spending and deficit pressures increase. We've been firm in our call for longer-term treasury bonds to stay above 4%.
Next, in commodities and currencies, we're seeing contrasting movements.
Gold is down as safe haven demand has eased and investors move into risk assets. Oil prices have dropped too, reflecting trade uncertainties and anticipated changes in global demand.
The dollar, on the other hand, is strengthening. It's up nearly 2% as investors shift toward U.S. assets. And meanwhile, cryptocurrencies like Bitcoin are reaching record highs. Investors see the new administration potentially easing regulations on crypto, and that has sparked enthusiasm and some big inflows across digital markets.
International markets have responded cautiously to Trump's election win, with emerging markets experiencing the strongest pressures.
In Asia, the Hang Seng index dropped over 2% and the yuan saw its largest one-day decline in two years as investors reacted to the likelihood of renewed U.S.-China trade tensions.
European stocks are mixed. While industrial and energy sectors are showing gains, exporters are facing challenges from the stronger U.S. dollar. And in emerging markets more broadly, currencies have been volatile as investors prepare for a potentially more protectionist U.S. trade policy.
Overall, global markets are displaying some resilience, but they are also approaching the new U.S. administration with caution, weighing potential trade and currency risks alongside of the positive outlook for growth.
We continue to recommend investments in the U.S., and we do remain somewhat skeptical about the opportunity set internationally.
So, moving on to policy implications, with Trump back in office, policy shifts are expected in several areas.
First, new tariffs are likely to go into effect quickly once Trump assumes office, especially targeting China, with potential rates up to 60% on certain imports.
This will support domestic producers, but it could also raise costs for consumers and companies that are reliant on foreign goods.
Taxes could see a new round of cuts, particularly for corporations, with proposals to lower the corporate tax rate from 21% to 15%. While these cuts can spur growth, they may also expand the deficit, and that will add pressure to government debt levels.
On the immigration front, Trump's policies could lead to deporting millions of undocumented immigrants. And while this may create wage pressures in industries like agriculture and construction, a significant drop in aggregate demand could weigh on GDP growth and even introduce deflationary effects as consumer spending declines in key sectors.
Still, the potential for a major boost to GDP and economic growth from pro-business policies could continue lifting markets, counterbalancing inflationary pressures and driving positive momentum.
Finally, let's talk about the Federal Reserve.
The Fed has already set a path toward lowering rates to support the economy. And tomorrow we are expecting a further quarter-point cut. However, Trump's win does bring potential challenges for Fed independence with the president-elect's previous stance toward influencing Fed policy.
This raises questions about how the Fed might navigate its future decisions, especially if inflation rises faster than expected.
But for now, Chair Powell is expected to stay focused on economic data and keep a neutral stance, but the direction could shift if inflation does accelerate.
So, in conclusion, while the market is rallying, it's going to take some time for the political landscape to settle, and we're not gonna know for certain about the outcome in the House for a while. For now, though, this election result has brought some clarity, removing an overhang that's been weighing on investor sentiment. We'll continue to watch these developments closely, and any updates to asset allocation guidance will come from a careful analysis of the political and economic impact. But remember, we are here to help you navigate these changes. For now, let's stay calm, keep focused and note that the rally is positive for your portfolios.