How might the U.S. elections influence markets?
Risk assets rallied on Wednesday morning, with Donald J. Trump seemingly on track to return to the White House and the potential for the Republican Party to gain control of both the House and the Senate.
Post-election market rally
The S&P 500 Index hit a fresh record high, up 2.0%, small caps gained north of 4.5%, while Bitcoin is up nearly 6.0% on Wednesday morning.1 It’s fair to say that market expectations for potential pro-cyclical policies under the incoming Trump administration are likely to have contributed to the positive sentiment.
Notably, shares of regional banks also surged, as financials are seen as one of the big winners from possible deregulation. Meanwhile, bond yields are surging (the 10-year U.S. Treasury yield is up ~15 basis points (bps), to 4.47%, as of this writing), likely reflecting investors’ deficit concerns (and, to a lesser extent, the potential for tighter immigration policy that might push up wages). The U.S. dollar gained more than 1.5% against a basket of major currencies, moving in tandem with higher rates.1
10-year U.S. Treasury yields (%)
The 10-year Treasury yield is now up over 80bps since mid-September, a move that’s been tightly correlated with the improvement in Donald Trump’s odds of winning the election. In light of the dramatic move in yields within such a short period of time, we wanted to look back at the bond market during the 2016 election.
As it turns out, the 10-year U.S. bond yield jumped post-election in 2016, likely because the outcome was a bigger surprise to markets back then. This time around, we’ve seen significant moves pre-election—possibly because the bond markets have been expecting a Trump win.
It’s worth noting at this point that back in 2016, the 10-year yields went into a consolidation phase for a year after the initial surge and then ramped on pro-cyclical policies, most notably the 2017 Tax Cuts and Jobs Act (TCJA). By 2019, however, they came back down near where they started as disinflationary forces took hold due to the lagged impact of monetary tightening policies that were announced throughout 2017 and 2018. While no historical example is perfect, this is a road map worth considering—particularly since TCJA provisions are due to expire at the end of 2025 and the issue of tax reforms will come into focus again.
U.S. mid caps deserve investor attention
On the equity side, we expect U.S. mid-cap stocks to benefit from any upcoming pro-cyclical policies while managing valuation risk. Although small caps are surging on the back of the outcome of the election, we prefer moving up in cap to mid-cap equities as they feature higher-quality, more profitable businesses, and having an overweight in the industrials sector, a potential winner under looser fiscal policy. In addition, mid caps can have a role to play in helping to protect portfolios from the valuation risk that we’re seeing in U.S. equities.
Stocks have gotten historically expensive, with the S&P 500 Index trading at 26x trailing earnings today, up from 17x two years ago (this is the third-highest valuation on the index in modern history, only behind 1999/2000 and 2021).1 Within the U.S. equity market, mid caps are trading at the steepest discount to their large-cap counterparts since the late 1990s, helping lower valuation risk.
Fixed income: balancing credit and duration risk
On the fixed-income side, we’re balancing credit and duration risk, advocating for core-plus positioning with overweights in mortgage-backed securities and investment-grade corporate bonds in the middle of the credit spectrum.
Lower-quality credit has become increasingly expensive as of late as high-yield spreads remain tight at 278bps, well below their 20-year average of roughly 500bps,1 meaning there’s a chance that high yield is priced to perfection.
On the other side, long duration could see issues if there’s greater deficit spending, as it increases supply and strengthens the economy (reducing the need for the U.S. Federal Reserve to cut rates). This leaves us in the middle of the credit and duration spectrums, balancing risks with intermediate core-plus-type fixed-income mandates.
As always, we expect more clarity to emerge over the coming days and weeks. For now, though, markets might be able to heave a sigh of relief as the fog of uncertainty associated with the presidential election lifts.
1 Bloomberg, as of 11/6/24.
Important disclosures
The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.
All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management, nor any of its affiliates or representatives (collectively “Manulife Investment Management”) is providing tax, investment or legal advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation doesn’t guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
This material has not been reviewed by, and is not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand.
Copyright 2024 by Manulife Investment Management. Manulife Wealth and/or Manulife Private Wealth are using with permission. The statements and opinions expressed in this article are those of the author. Manulife Wealth and/or Manulife Private Wealth cannot guarantee the accuracy or completeness of any statements or data.
Manulife, Manulife Investment Management, Stylized M Design, Manulife Investment Management & Stylized M Design, Manulife Wealth & Stylized M Design and Manulife Private Wealth & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.
MF3947948
