US election result favors 'Trump trade' bets as stocks, bond yields move higher

Former President Donald Trump's victory in the US presidential election provided unexpectedly quick closure to months of market uncertainty, paving the way for risk-on market activity that will likely push equity values and US Treasury yields higher in the coming weeks.

The S&P 500 gained 2.5% on Nov. 6 following the announcement of Trump's victory earlier in the day. Meanwhile, the benchmark 10-year US Treasury yield ended at 4.42% on Nov. 6, up from 4.26% a day earlier and the highest level since July. Yields move inversely to bond prices, with the rising yield signaling a bond sell-off as investors pile into equities.

The market moves show a follow-through of the "Trump trade," or investing patterns in recent weeks that reflected expectations of a Trump presidential win and Republican gains in the US House of Representatives and US Senate, which could portend a future slate of business-friendly policy initiatives and higher risk appetite in equities. However, while the party has locked down the presidency and Senate majority, the success of its policy agenda will still hinge on the final party makeup of the House.

"What these asset moves are telling us, is that Trump's second term will follow the first, and that is tax cuts, deregulation and tariffs that will simultaneously spark economic growth and corporate profits, but with it, inflation," said Jeff O'Connor, head of market structure in the Americas for Liquidnet. "It's a little shocking that markets are reacting the way they are given the House uncertainty, but I think the conviction of the executive win is going to support the conviction behind the Trump trades."

Trump's incoming administration may also consider a tighter approach to government spending compared to his previous presidential term, which would benefit the economic growth that would underlie further gains in equities.

"This time around, he seems to be acknowledging the fiscal reality of the national debt and appears more focused on reducing waste while reallocating funds toward growth initiatives," said Kevin Philip, partner at Bel Air Investment Advisors. "If Trump aligns with visionary leaders to drive or reshape American policy, we could see significantly positive economic outcomes."

Steep yield rise could slow

The yield on the 10-year US Treasury bond has mostly climbed since mid-September, trending with sticky inflation and expectations of an expanding government deficit that could both persist under Trump's proposed policy agenda. The post-election spike in the yield is an extension of this trend, although it may show a disconnect between Trump's campaign proposals and the eventual success of policy implementation.

"After the recent sharp increase in yields, we think that yields are higher than warranted," UBS analysts said in a Nov. 6 research note. "The market appears to be taking a strong view on the potential inflationary impact of Trump's policy agenda, when there is still considerable uncertainty over the extent to which it can be implemented or its actual effect on inflation."

Trump's eventual policy enactments with taxes and tariffs may have various impacts on inflation and deficit spending, with a net impact of pulling yields down.

"The primary concern is that tariffs and tax cuts might be enacted first and most quickly, which would worsen an already concerning deficit outlook, negatively impacting Treasury yields," Bel Air's Philip said. "If lower taxes and a reallocation toward growth sectors lead to sustained economic growth, we could see an improved economic outlook that eventually brings yields down."

Volatility subsides

Market volatility in the weeks leading into the election dissipated overnight.

The CBOE Volatility Index, which measures the 30-day expected volatility of the US stock market, dropped about 20% on Nov. 6.

Even if volatility picks up in the weeks following the election, the market may be in a strong position to weather it.

"While it has dominated the market for months as an overhang, it is the very strong continuous institutional volumes that have made for a healthy market so far in 2024," Liquidnet's O'Connor said. "It will come down to the ability of Trump to implement his policy promises to support these asset classes on the move, along with the strength of the economy."