Since the election result was known, US stocks and the dollar have been on the rise. This initial market reaction seems logical given what we know about Donald Trump’s electoral program. Republicans won the required majority in the Senate and House of Representatives, giving them greater freedom to implement the future president’s campaign promises.
Focus on the Trump 2.0 electoral program
Donald Trump’s most emblematic economic proposal is that which aims to lower the tax rate on companies producing on American soil. This promise, in addition to the financial deregulation and lifting of environmental constraints that he proposes, has been favorably received by the markets, because they are conducive to business.
Trump 2.0’s other proposals could undoubtedly impact inflation, for two main reasons. First, if the number of people active in the American labor market is increasing today, it is also thanks to immigration. His proposal to restrict immigration and deport millions of migrants could lead to increased inflationary pressures on wages in some industries. Second, its protectionist instincts could lead to all-out import taxes, risking increasing imported inflation. Both of these would make it more difficult for the Federal Reserve to bring inflation back to the 2% target. In this sense, the increase in long-term interest rates since November 4 seems rational, especially since according to estimates, a Trump administration would worsen public finances to a greater extent than the Democrats.
Finally, note that the United States’ posture towards China risks hardening due to its proposal to appoint people to high-ranking positions who have an extremely negative view of China.
The impact on the markets
American economic activity remains solid, as evidenced by third quarter growth estimated at +2.8% annualized and corporate profits continuing their expansion phase. Inflation, for its part, is under control, which should allow the Federal Reserve to continue the monetary easing begun in September. That being said, key rates are likely to fall less under Trump 2.0 than previously anticipated. Business-friendly measures combined with solid economic growth and rate cuts from the Federal Reserve generally provide a favorable environment for stocks.
Since the day before the elections on November 14, US stocks have gained just under 8% in euros, while European and emerging stocks have offered a slightly negative performance. It is very likely that this trend of outperformance of American stocks will continue if its threats of customs duties are introduced. Indeed, Europe and emerging countries have more to lose given the larger share of exports in their economies compared to the United States.
Finally, the US dollar could continue to rise in value against the euro for several reasons. First, economic growth is much better in the United States than in the euro zone, which favors the dollar. Second, slightly higher inflation under Trump 2.0 (compared to a scenario where Harris was elected) argues for fewer Fed rate cuts, which is also a positive for the dollar. When trade tensions between China and the United States reached their peak in 2018 and the first part of 2019, the dollar appreciated, which offset – albeit partially – the additional cost borne by American importers resulting from import taxes. It is not impossible that this period offers a good roadmap for the future evolution of the US dollar.
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