When it came, Donald Trump’s reelection to the White House as anarchist in chief wasn’t unexpected.
But the scale of his victory – and just how quickly the result was declared – was a surprise.
No wonder markets scrambled to recalibrate in the hours that followed.
The morning in London after the night before saw nearly all risk assets open higher. (Gold was one notable exception).
But as the day wore on, American stocks overwhelmingly prevailed.
US equities ended Wednesday broadly 2% up – and nearly 6% higher for the US small cap index.
But UK and European shares floundered. Indeed the German market closed down for the day.
Tariff-ick
To some extent the market was clearly trying to price in the now-certainty of President Trump – and hence the imminent possibility of some incarnation of his much-touted protectionism and trade tariffs.
For instance, here’s how high-end spirit makers traded over the past few days:
[1]Source: Google Finance
You can see shares in all these companies fell 3-7% the day after the election. If Trump applies tariffs of 20-40% to French cognac, say, then Remy will sell less of it in the crucial US market. So that’s rational.
But note I’ve also included Brown-Forman – the US maker of Jack Daniel’s – alongside the European brands. And it fell too – more than 7% – the day after the election.
That’s equally rational. If the US imposes tariffs then so will its trading partners.
David Ricardo [2] explained 200 years ago why countries do best following free trade principles.
But we live in an era where many people prefer tweets to textbooks, and protectionism and nationalism are back in fashion.
Musky smell
Imposing high tariffs will hurt global trade and make the US a little poorer than it would otherwise have been (although I’d concede the rest of the world will probably come off worse).
One reason the US will suffer is because the dollar will likely strengthen in a more fractious world. This will make US exports less competitive on the global stage, even excluding the tariff tit-for-tat.
Again, any student of economics knows this.
But Trump’s tariffs aren’t really designed to increase wealth. They are for winning votes, and for supporting his favoured industries and companies.
Here’s a striking example of the latter, pitching Tesla against the iShares Global Clean Energy ETF:
[3]Source: Google Finance
Trump says he will roll back environmental initiatives and cut government programmes aimed at driving renewable energy take-up. This should benefit fossil fuel companies. Especially coal miners.
True, it didn’t work out that way last time, for various reasons.
But that’s the ‘Trump Trade’ view.
And here we can see iShares’ global clean energy ETF did modestly puke on Trump’s victory on Tuesday.
Yet at the same time shares of Tesla – a dominant manufacturer of electric vehicles and solar energy products – saw its largest one-day share price gain since the pandemic.
Of course Tesla’s CEO and major shareholder, Elon Musk, pretty much ran Trump’s re-election ‘ground game’ and turned his social media platform X (formerly Twitter) into an electioneering machine. Musk himself [4] many times repeated false election fraud claims.
Given the relative performance of the iShares Clean Energy ETF and Musk’s clean energy and transport company following the result, it seems probable the market is putting more weight on Musk’s political proximity to Donald Trump than on the fundamentals for Tesla versus other similar stocks.
Now, we could debate all day how America ‘won’ the 20th Century.
However I’d contend that a largely meritocratic and competitive capitalist system wedded to a genuine shareholder democracy played an outsized role in pulling it and its citizens ahead.
By contrast, a return to crony capitalism and the robber baron era won’t be in the interests of most Americans.
Trump 2.0: sequel fatigue
All that said, as I write – two days on from election – there are signs the initial post-Trump moves in the markets are waning.
Those drink makers rose today. Gains in Germany are about twice those logged in New York so far.
This suggests the knee-jerk post-election market move was as much a symptom of some traders being out of position and/or hedges being unwound – plus a bit of emotional tumult – than a completely sober repricing of risk and reward.
After all, the only thing we know for sure about a Trump presidency is that it will be unpredictable.
Tariffs, for example, could be implemented at a high level. Or they could just be a negotiating tactic.
The same will be true across the barrage of uncertainty we can look forward to. Whether it be the future of international relations and bodies such as NATO and the UN, to an immigrant wondering if they’ll be deported.
The possible, probable, and unthinkable will only coalesce in the months and years ahead.
Zero sum games
If we are to take Trump and his followers at their word, the election result is a mandate to pursue an America First policy of bilateral agreements, tariffs, and regulatory rollback aimed, they would say, at making America Great Again.
That America is already the richest country in the world and by far its strongest-performing economy – with leadership in most of the key industries including AI, and with the strongest military and nuclear stockpiles – appears not to matter to the electorate.
Maybe after the huge inflation shock of the past couple of years and the hollowing out of American hard industry over the past 30, that’s fair enough, in so far as it goes.
America is an unequal society, and while the average American is much richer and earns a lot more than the average Brit, that hardly matters to Joe Sixpack enviously eying millionaires on Instagram while he struggles to afford a home.
However Trump can’t reverse the technological progress behind so much societal change.
And even in as much as his tariffs might superficially favour certain US groups, they’ll ultimately do more harm than good. Just like last time.
As per the Brookings Institute’s assessment [5] of Trump 1.0:
- American firms and consumers paid the vast majority of the cost of Trump’s tariffs.
- While tariffs benefited some workers in import-competing industries, they hurt workers in sectors that rely on imported inputs and those in exporting industries facing retaliation from trade partners.
- Trump’s tariffs did not help the U.S. negotiate better trade agreements or significantly improve national security.
None of this would have surprised Ricardo.
But what might have raised his eyebrows is that the country with the most globally dominant firms – the biggest winner of the global order that its grandparents and great-grandparent’s forged with their sweat and blood – would now vote against its own economic interest.
A world of pain
If the US does go down the protectionist path, then the forces of Hubris and Irony will one day have their revenge.
Little comfort for those of us caught up in the consequences, admittedly.
Indeed where Trump is correct is that the UK, Europe, and the rest of the free world has benefited enormously from US economic and military leadership over the past 80 years.
If the US retreats, we’ll feel it economically and in our politics and national security. Needless to say Britain looks particularly exposed following our own quixotic decisions of the past few years.
The US can probably coast for a couple of decades however on the momentum of its enormously successful economy.
And if this political movement endures then its leaders can find other scapegoats by the time the costs are clear.
Identity theft
Of course this election wasn’t just about economics. In part Trump’s popularity must be a backlash against the extremes of the progressive agenda over the past couple of decades.
On that note, it might surprise my usual half-a-dozen critics to hear I was noting to friends last week how the Democrats’ website flagged it was fighting for 16 groups – from African Americans to Latinos to Women – but it apparently didn’t see the white male majority among its constituents:
[6]At a time when more American women go to college [7] then men – including for professions such as law [8] and medicine [9] – while the relative earnings of men without a college degree have declined [10] for decades, you can see this could stick in the craw, regardless of your views about the bigger societal picture.
In fact early post-vote analysis suggests many minorities voted for their candidate of choice, rather than the one supposedly prescribed to some identikit community. Lots of Latinos voted for Trump, for example.
I’m all for it. Personally I’m no fan of the extremes of identity politics. We’re all equal individuals as I see it, and while structural inequalities do still exist, an enlightened government can seek to improve things without pitting groups as victims and oppressors, and putting people into boxes along the way.
Some Monevator readers think I lean very left. However as I’ve noted many times before, my own friends [11] think I’m the semi-acceptable face of the right.
In reality I’m that unfashionable 1990s’ middleman – economically a capitalist [12], but socially a liberal.
That’s because when it comes to both trade and society, I believe the same thing…
…we’re all in it together.
Born in the USA
To conclude, the political shift in the US hardly has me jumping for joy. But there’s not much I can do about it.
For at least the next four years, political risk is back on the table. Especially if you’re an investor in individual companies with any exposure to foreign markets or foreign competition.
We’ll all feel the knock-on effects. From our mortgage rates – Trump’s plans seem inflationary, which will keep US rates higher than otherwise, with consequences for our own interest rate in the UK – to our taxes. For instance we’ll probably have to spend more on defence.
I’ll leave issues such as sleeping at night with an aggressive Russia on the borders of Europe as an exercise for the reader.
Finally, comments welcome, but please focus on the economy and markets.
I know I mentioned identity politics above, but that was because leaving it unsaid would clearly only present half the story.
There’s a vast Internet out there for those who want to go down that rabbit hole.
Botty mouths
On that note, since the election, Monevator comments have been inundated with spam-like postings such as this (identity redacted):
[13]The spam filter identifies them as such. The posters have no prior history of posting on Monevator. They are not on our mailing list. I presume Russian or Chinese bot farms are the source.
But honestly it’s sometimes hard to tell the difference between bot-spam and the bold and radical views of our one or two Blimpian [14] readers. So I’ll delete anything not about global trade, markets, or investing with extreme prejudice for the sake of an on-topic discussion. Save your fingers!
Finally I wish America – a country I’m very fond of – and all her citizens the best of luck.