November – Markets love the color red
By now, it is old news that Trump won the race and will have quasi-unchallenged powers. Indeed, besides the presidency, which he won with a greater margin than back in 2016, Republicans took over the Senate and the House in a so called “red sweep”, showing once again the limits of polls when it comes to predicting outcomes of very polarized elections.
The markets loved it, or we should say the US markets loved it. All sectors of the S&P 500 are up this month, with the consumer discretionary sector taking the crown at +13% performance. What markets liked about the win are the prospects of tax cuts and deregulation (more on that in the chart of the month section). However, it seems any potential negative policies and effect were swiped under the rug, such as the tariff threats and the increased inflation that could result from such an executive order, which in turn could lead the Fed to hike interest rates next year (not currently priced by the market). The most surprising is the energy sector bouncing (+7.7%) and the overused “drill baby drill”. If you understand the basics of macroeconomics, you know that increasing drilling means increasing supply and with a demand remaining at the same level, prices should be going down and hence depress energy company valuations. It is unlikely energy demand will go up as long as China’s economy remains sluggish. In fact, let’s remember that the worst performing sector under the first Trump presidency was the energy sector.
Data source : Bloomberg
You might recall that in early 2022, most economists agreed that a recession was coming, the only question was the severity. We would argue that the markets had priced in a recession, hence the extremely bad performance of the stock market, but the 7% of GDP deficit largely contributed to the positive growth. Trump is looking at reducing the government debt while decreasing revenues (via tax cuts). This means spending would have to be reduced significantly. He seems serious about it, having already committed to create the Department of Government Efficiency (DOGE), to be headed by Musk and Ramaswamy. If those spending cuts materialize, that will automatically negatively impact US growth, thereby bringing about the long-awaited recession. We are not there yet and it may sound like a very pessimistic scenario. After all, the job market is stable and healthy, the composite PMIs are still in expansion territory, growth is positive, but this is just an example of why the current stock market performance is hard to comprehend, given that the outlook is not all that rosy.
Europe and Emerging Markets were at the receiving end of the rhetoric, taking regional indices into red territory for the month of November. With threats of tariffs on China, Mexico and Canada, many are anticipating Europe to be next. We remember Trump has made similar threats in his first presidency, which allowed him to negotiate the NAFTA 2.0 or what is now called the USMCA agreement. Threatening Mexico makes sense if he intends to keep his campaign promise to stop immigration and drugs from coming across the border. But why Canada? Canada is a huge supplier of energy to the US, tariffs would only hurt the American people and raise inflation. China knows a thing about tariffs as they were directly targeted by Trump the first time around. There is little doubt that he would hesitate to do it again. This leaves an already battered Chinese economy with poor prospects.
Tariffs on European goods would not be good news for the economy as the US is the largest trading partner (20% of goods exported to the US). Germany being a large manufacturing country, it would be significantly impacted and its growth prospects even poorer than they are currently. Moreover, Germany is currently facing an internal political drama, which even led the German 10-year swap rate spread to collapse into negative territory for the first time in history. This means the risk on the 10-year bund is perceived as higher than the counterparty risk in a swap. It is back in positive territory at month end. France’s 10-year yield also reached levels higher than even Greece (once part of the “PIGS” countries).
Our summary recommendations
We believe our current avoidance of Emerging Markets in both debt and equities, and of Europe is still sensible. Prospects for these regions under Trump’s “America First” policies will certainly bring about volatility that we would rather avoid in a long only format, though we may use that volatility in structured products with low strike to reach attractive coupons. We reinforced the US equity long only exposure through an ETF on the S&P400, comprising large US companies being much less international than those included in the S&P500.
Chart of the month
The chart shows the surge in the price of bitcoin by over +46% (most other serious crypto currency experienced a similar rise) since the election of Donald Trump. This brings it within a hair of the $100,000 price milestone.
The reason for this enthusiasm is the favorable position of the President elect on cryptos. This is further evidenced by the fact that the Trump campaign was accepting crypto donations, and the family launching their own crypto coin.
One of Trump’s campaign commitments was deregulation, so it is unlikely that he will choose to regulate this market, opening the door for free exchanges and further crypto linked financial products.
This doesn’t represent in any way a recommendation to invest, Cryptos not being part of our investment universe.
Data source: Bloomberg
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