Market Insights: Actions Speak Louder than Words

By: Wayne Yi, CFA

This November presented Americans with one of the most contentious battles in recent history. After months of preparation between the two contenders, and the anxiety that built up amongst their respective supporters, over 100 million viewers were gripped to their TVs to watch the final showdown. I’m not referring to the 2024 presidential election, but to the much-anticipated boxing match between the legendary “Iron Mike” Tyson, and the YouTuber Jake Paul. Despite all the bluster between the two leading up to the match, Paul backed his words and showed that he was able to execute in the ring and emerge victorious.

Earlier in the month, former President Donald Trump prevailed over Vice President Kamala Harris to become the 47th President of the United States in what was anticipated to be a hotly-contested election. Surprisingly, the evening went smoothly, with over 150 million votes tallied and both candidates accepting the results by early Wednesday morning. When compared to 2016, it is notable that Trump not only clinched the electoral votes needed from critical swing states but also won the popular vote. Coupled with a flipped Republican majority in the Senate and maintaining control of the House, President-elect Trump and the Republican party have a clear mandate from the majority of the country to deliver on his campaign promises, including tax cuts, higher tariffs on imports, increased energy production, lower interest rates, and government deregulation. These are very pro-business, America-first, themes and the markets reacted accordingly.

Stocks shot up on the following market open, most notably among Financials, Industrials, and Energy sectors as well as cyclically-sensitive small cap stocks, while international markets and interest rate sensitive sectors and bonds sold off. The Fed reduced rates an additional 25 basis points a couple days later, further fanning the flame for risk assets. The S&P500 index ended up over 5% through the first full week of November, putting it just a few points shy of delivering a 30% year. We are often asked how to position portfolios ahead of major elections, and a market reaction like this demonstrates why. While we always appreciate market rallies, we take the view that these are short-term, sentiment-driven trades that require further fundamental support and policy follow-through in the coming years to maintain and build upon these initial gains. Campaign promises shine a spotlight on potential investment opportunities leading up to an election, but the follow-through on how they are enacted and implemented determines the long-term benefit they could have on markets. Additionally, we must also acknowledge and plan for the risks that may come about from these actions.

A recent Barron’s article^[1] highlights this effect, noting that after Trump’s win in 2016, segments like real estate, traditional energy, and small-caps should have benefitted. These sectors rallied immediately on the back of Trump’s victory, but when the realities of economic pressure from trade wars and rising interest rates set in (recall that there were rate hikes and quantitative tightening in 2017-2018), that outperformance evaporated. In the following presidency under Biden, renewable energy companies were expected to be winners under his climate initiatives, but actual performance flailed while traditional energy prevailed. Even the best-intended legislative actions are subject to the whims of business cycles, changing interest rates, and other exogenous events like wars and pandemics. As we look towards 2025, Trump’s presidency should be beneficial to businesses and the stock market in general, but we also need to assess the risks of stickier inflation and a greater national debt burden that could dilute those intended benefits, if not undo them.

Winning the White House and having the support of Congress puts President-elect Trump in a unique position to push through many of his campaign promises quickly, and thus necessitates our close monitoring of how they may be implemented and what could be affected. Below, we consider a few notable factors and their potential impacts:

Taxes

There is a big sigh of relief from corporations and wealthy taxpayers as the 2017 Tax Cuts and Jobs Act will most likely be renewed next year and potentially enhanced by removing the cap on SALT deductions and selectively further reducing the corporate tax rate. These are economically stimulative actions, as it keeps more wealth with taxpayers, but will reduce tax revenues, further pressuring the national deficit and exacerbating the need for more borrowing. If the Democrats had won, there would likely have been fewer tax cuts and more government spending that would have directionally put us on the same trajectory, but likely with less benefit to businesses.

               WINNERS: Taxpayers and Businesses. Tax cuts aim to accelerate the economy.

               LOSERS: National deficit. More government debt would likely increase long-term interest rates.

Tariffs

President Trump will pick up the baton again to rebalance trade with China. Biden had a similar stance and largely maintained the pressure that was initiated under Trump’s first presidency, but if you recall, trade negotiations between the two countries were cut short by COVID. We expect Trump to reengage with further pressure via tariffs. While meant to be protectionist of American businesses, tariffs have an inflationary effect by raising the cost of goods, counter-acting the restrictive rate cycle by the Federal Reserve, and causing the path of rate cuts to slow. Retaliation against US exporters would also work against economic growth.

               WINNERS: Domestic businesses. Tariffs can increase demand for locally produced products. 

               LOSERS: Consumers, China and foreign exporters. Tariffs weaken global trade and are inflationary.

Regulations

The Trump administration will likely push for general deregulation to spur economic growth. However, certain sectors might come under targeted reform to the negative, such as media, healthcare, and renewable energy. It will be interesting to see how the pullback of tax credits for electric vehicles plays out. It will hurt Trump’s BFF, Elon Musk, in that Tesla cars are all electric and will also lose tax credits afforded to potential buyers, however the disincentive it causes for other makers and slowing their growth will likely net positive for him. A louder influence of SpaceX on our space program will likely be a boon for Musk as well.

               WINNERS: Financials, Industrials, Energy, Musk. Businesses benefit from looser regulations.

               LOSERS: Communications, Healthcare, Renewables. There is a risk for bad corporate behavior given looser standards.

Immigration/Labor

In addition to tighter border controls, we anticipate tougher immigration policies. Similar to tariffs on goods, limiting the inflow of prospective workers is inflationary and may pressure wages upwards again, something the Fed has been fighting the past few years.

               WINNERS: Domestic workers. Restrictive immigration policies can limit foreign labor competition.

               LOSERS: Businesses and Consumers. A tighter labor supply would increase the cost of production.

Interest Rates

There is no love lost between President Trump and Chairman Powell, despite both looking to lower rates. However, Trump wants to cut rates further and weaken the Dollar to boost economic growth, while Powell continues to take a measured approach especially as inflation is slowing, but still remains above long-term targets. Trump’s anticipated economically stimulative measures will likely overwhelm a cautious monetary stance. While Trump cannot fire Powell, being the Fed Chair will not be enjoyable over the next one-and-a-half years.

               WINNERS: Borrowers as the cost of carrying debt will decline. Lower interest rates can lead to increased business investment and consumer spending. 

               LOSERS: Powell, Inflation. Lower interest rates increase the flow of capital and is thus inflationary.

Fiscal Policy

A curious potential offset to the growing fiscal deficit is the advisory commission known as the Department of Government Efficiency (DOGE) with a lofty aim to potentially stave off $2 trillion in government spending. This is an incredible number, given that the US budget in 2023 was about $6 trillion, with about $4 trillion of that considered non-discretionary, and Defense spending being a large piece of the remaining. While we are for efficiency and productivity enhancements wherever possible, especially in regards to narrowing the deficit, the risk is that it could come at the cost of ineffective government programs, services, and oversight. We would view this as another potential element in deregulation.

               WINNERS: Taxpayers, Musk, again. Narrowing the deficit is positive, but, could cause social and economic disruptions. 

               LOSERS: Federal workers, social services and public administration, and regulatory enforcement. 

Cryptocurrencies

Trump has jumped on the cryptocurrency bandwagon, wanting the US to be a leader in blockchain technologies and ownership, and is establishing a crypto advisory council. This has driven Bitcoin to rally over 40% this month. Beyond the price of tokens, we expect research and investment to accelerate into the space, as well as broader capital markets access and adoption for retail investors. SEC Chair Gary Gensler, who had been a crypto cynic, has resigned ahead of a potential firing by Trump. As Bitcoin is considered a store of value, like gold, in some regards, the asset may serve as a hedge to inflationary pressures.

               WINNERS: Blockchain ecosystem and custodians that survived the FTX fraud, and Musk. 

               LOSERS: SEC Chair Gensler, fiat currencies. 

Finally, a word on the build-out of Trump’s Cabinet. It is no surprise that the President-elect is surrounding himself with close allies. We won’t measure the credentials of his appointees here but will highlight the announcement of Scott Bessent as the winner of the hotly contested role as the next Secretary of Treasury. Like Sec’y Steve Mnuchin under Trump’s first administration, Bessent also comes from a deep Wall Street background, and while opinions on his market and policy views may vary, he is overall well-respected and brings significant financial markets experience that can temper some of the concerns around Trump’s policies noted earlier. International markets reacted positively to the news as Bessent is likely to take a thoughtful, pragmatic approach to implementing Trump’s policies.

As with any material market-moving event, we look to be thoughtful and long-term focused when evaluating investment opportunities and positioning for potential risks beyond the headlines. Directionally, we expect this administration to be constructive for businesses and stocks, but execution will be key as there are high expectations already baked into current prices. It will be an interesting transition to the new government, and we look forward to finding opportunities through it as we head into the new year.

Asset Allocation Recommendations

Equities: Target-weight

Equity markets have performed well this year on the back of strong earnings, higher multiples, and now a pro-business administration. Large cap growth stocks have led the pack, but we are to see cyclical value and smaller-cap companies gaining positive momentum, supported by a backdrop of lower rates. More reasonable valuations have also drawn attention versus the Mega-caps. While international stocks are cheaper, Trump’s protectionist agenda causes us to be underweight and more selectively oriented towards higher quality businesses.

Fixed Income: Target-weight

The Fed has now cut rates twice, with likely one more to go in 2024. Rates will continue to move lower into 2025, however a more aggressive fiscal program may reinvigorate elements of inflation and cause the Fed to slow from its current path. While short-term interest rates will fall, the impact on longer-maturity bonds may be muted. Thus, we are staying relatively shorter-duration and picking up incremental returns from credit and securitized assets above treasuries, which can enhance income from this asset class. We barbell this allocation with high-income producing private credit and liquid investment grade bonds.

Liquid Alternatives: Target-weight

Hedge Funds: Hedge funds continue to serve as the diversifying asset class to traditional stocks and bonds. We continue to increase exposures to uncorrelated and macro strategies while culling more directional allocations.

Real Estate: The asset class has fallen out of favor with rising rates and looming debt maturities, despite their long-term inflation-aligned characteristics. Given depressed values, we are seeking opportunistic investment strategies in both debt and equity that can offer enhanced return potential without taking material risk.

Illiquid Alternatives: Target-weight

Valuations are beginning to recover for private equity investments, and a renewed IPO and M&A environment as we head into 2025 should bode well for asset sales and distributions of capital back to investors. Venture capital investments will also follow suit, but to a more muted degree. We view the current environment as very attractive for new commitments, particularly as the Tech and Artificial Intelligence themes continue to proliferate.

References

^{[1] Stocks Soared After the Election, But Campaign Promises Don’t Always Lead to Lasting Gains, https://www.barrons.com/articles/stock-market-election-trump-rally-8b5727cb}

About Wayne Yi, CFA

Partner / Chief Investment Officer

Wayne Yi is the Chief Investment Officer and a member of the Simon Quick Investment Committee and Executive Committee. In addition, Mr. Yi is also a member of the firm’s DEI Committee which aims to foster an environment of inclusion and promote diversity in the workplace. In his role as CIO, he drives the firm’s market outlook, allocation strategy, and investment implementation processes for client portfolios. He works with the Investments team to prioritize opportunities and oversees market research and manager diligence across traditional equity and fixed income strategies as well as alternatives, including hedge funds and private equity allocations.

Prior to joining the firm, Wayne was a Co-Portfolio Manager and member of the Investment Committee for SAIL Advisors, a hedge fund investment firm headquartered in Hong Kong. He also served as the Senior Analyst for their Credit and Event-Driven strategies. Prior to SAIL, Wayne was the Sector Head for Credit and Event-Driven strategies at Robeco-Sage, a hedge fund investment firm based in New York. Wayne started his career in investing at Delaware Investments as a Research Analyst for high yield and investment grade bonds across various industries. He then joined Goldman Sachs’ Investment Research department where he was the Senior Analyst covering high yield bonds in the Technology sector.

Mr. Yi is a CFA charterholder and a graduate of the University of Pennsylvania where he received a B.A. in both Economics and International Relations.

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