The Trump Effect: Wall Street goes on a buying spree

Donald Trump’s victory in the presidential election on Tuesday has sparked a positive reaction in the central US stock indexes, which closed at historic highs this week. The Dow Jones Industrial Average rose more than 1,500 points, reaching 43,800 points.

Meanwhile, the S&P 500 Index closed at 5,940 points and the Nasdaq at 20,800 points, which are unprecedented levels. This performance reflects market optimism regarding the economic policies the re-elected president may implement during his new term.

Trump’s win, coupled with a potential Republican majority in Congress, is a critical factor in this bullish trend. The US Congress is aligned with the Trump administration, economic policies are prioritising growth and Federal investment programs are expected to be easier to pass.

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Trump’s proposals include tax incentives for businesses, deregulation, and stimulus for strategic sectors like infrastructure and energy. This policy package has been well received on Wall Street, instilling confidence in the American economy’s capacity to expand.

In addition to the rise in stock indexes, the dollar and Treasury bonds also saw significant increases this week. The dollar’s strength reflects greater demand for US assets, as international investors trust the growth potential of the US economy under Trump’s leadership. Similarly, the increase in Treasury bonds suggests inflation expectations, which could lead the Federal Reserve to reassess interest rates.

“It’s important to note that markets are responding to domestic factors and potential changes in foreign trade dynamics that Trump may seek to promote,” explained Antonio Di Giacomo, an analyst at XS.com. “With a more protectionist approach, the US will likely boost domestic production and reduce its reliance on imports, benefiting domestic companies. This approach could alter trade relations, especially with Asian and European countries, but would also strengthen the country’s labour market and industrial production.”

Long term political tensions could be a problem

Some analysts caution that the initial optimism on Wall Street may have its limits if Trump’s policies generate trade or fiscal tensions that could affect long-term stability. For now, though, the market appears to support the vision of robust growth, benefiting from a government and Congress that share the same economic agenda.

Trump is unashamedly a protectionist and wants to Make America Great Again (MAGA). A cornerstone of the MAGA tenet is reducing trade deficits. Trump has previously used tariffs on imports to leverage countries’ behaviour or compliance with his stance. ‘Unfair’ or sudden increases in tariffs placed on countries can quickly escalate into trade wars, which occur when those countries retaliate with their own tariffs. This leads to increased costs on imports and exports.

If such policies are enacted, they could disrupt global trade and slow economic growth as businesses face higher costs and uncertainty. This disruption would likely be negative for financial markets, as companies could see lower profits and investors might pull back due to the increased risk. Trade wars can hit and disrupt financial markets in a far more sudden and unexpected manner than physical wars.

Post-election safe haven trade is unwinding

As we saw in 2020, the post-election pullback in safe-haven demand is unwinding, with traders ‘buying the rumour, selling the fact.’ Trump’s victory has sparked expectations of policies that could favour tougher tariffs, tax cuts, and expanded fiscal spending, which could stoke reflation fears. This is evident in the recent surge of US Treasury yields and the dollar index climbing above 105, diminishing gold’s appeal as a non-yielding asset.

Additionally, Bitcoin has reached record highs, a response to speculative demand and its appeal as a decentralised asset immune to political shifts. Trump’s pledge to make America ‘the crypto capital of the planet’ is also likely to have buoyed the asset.

The rise of BTC highlights a growing interest in alternative assets amid shifting economic policies and market responses, positioning it as a potential hedge if inflation and dollar volatility increase over the long run.

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