Election aftermath: Market reaction and economic outlook

As the dust settles after the US election, the financial markets have shown a generally positive response, with risk assets experiencing an upward drift. In November’s edition of Tactical Take, Jack Janasiewicz and Brian Hess discuss the implications of the election results on the stock market, bond yields, and positioning of the Natixis model portfolios.

Key takeaways

• The US presidential election resulted in a red sweep, leading to a positive economic outlook and market reactions similar to those seen in 2016. Small caps, banks, and crypto are outperforming, while emerging market equities are underperforming.
• The bond market is pricing in better growth prospects.
• While there is potential for inflation under the new administration, the actual impact may be less severe than feared.
• The Federal Reserve's recent meeting did not indicate immediate changes in monetary policy. Chairman Powell's neutral stance suggests the Fed is waiting for clarity on the new administration's policies before making adjustments.

Market reaction to 2024 election vs. 2016

The stock market reaction to the US presidential election has largely mirrored what occurred in 2016. Small caps, banks and crypto are outperforming while emerging market equities are underperforming.

The recent rise in nominal yields has been driven by higher real yields, indicating the bond market may be pricing in better growth prospects. It seems the bond market is comfortable with the ideas of the new administration for now.

“Trump is going to be pro-growth,” notes Janasiewicz. “There is a potential for an impulse for inflation to come back. The question is, how big would it be?”

The Federal Reserve didn’t make significant changes in its outlook post-election, hinting at another rate cut in December. The Fed is still in a position to continue lowering rates unless there is a resurgence in inflation. Chairman Powell's neutral stance suggests the Fed is waiting for more clarity on the new administration's policies before making any adjustments.

Labor market hits 2020 milestone

The labor market has shown signs of softening, with negative job creation in the private sector for the first time since late 2020. Temporary factors such as hurricanes and the Boeing strikes possibly contributed to the lack of new jobs.

Earnings season has been mixed, with strong performances from banks but weaker results from other sectors. There is a bifurcated consumer landscape, with the middle and upper classes continuing to spend while the lower class faces inflationary pressures.

Natixis model portfolio positioning

The current Natixis portfolio strategy includes maintaining an overweight position in US equities, specifically large caps, while being underweight developed international stocks. The portfolios are also underweight fixed income and slightly short duration relative to the benchmark.