Donald Trump has won the US presidential race, and the Republicans have reclaimed the Senate. As of Thursday afternoon, the House of Representatives remains up for grabs. The market reaction has been emphatic, with a broad-based rally pushing the US market to a record high. The biggest winners are those sectors which are ostensibly best positioned under Trump’s agenda: financials, energy, technology, and small caps. Meanwhile, the bond market is under pressure. The 10-year US Treasury yield rose roughly 20 basis points as the election result became clear, to a touch under 4.5%. The market has concerns about the inflationary potential of Trump’s pro-growth, America-first agenda. This also has implications for the US fiscal position, which, for a period of relative peace and outside an economic crisis, looks overextended [Exhibit 1].

Exhibit 1: US debt burden at exceptional levels

Gross federal debt held by the public (% GDP)

Source: US Office of Management & Budget, Morningstar. We may revise our base case macroeconomic forecasts as Trump’s policy priorities become clearer. But for now, we’re not factoring Trump’s two main trade proposals, the 10% blanket tariff and a 60% tariff hike on China, into our central case. Trade is one of the few areas in which a president can make sweeping changes without congressional approval, but at this stage, we think both proposals look more like pre-election bluster. Nonetheless, it’s a formidable starting point for negotiation with trading partners, and Trump may be able to extract concessions by brandishing this threat. In a previous article, we called out a couple of stocks that could do better under a second Trump administration: Iluka Resources (ASX:ILU) and James Hardie (ASX:JHX). Both seem better positioned for a world of deglobalization and onshoring. BlueScope (ASX:BSL), which had a good day as the election results rolled in, is another potential beneficiary. China accounts for around half of global steel production, and the US is one of the world’s largest importers of steel. European steel exporters, too, could also find themselves in the crosshairs, given the European Union runs a sizeable trade surplus against the US. The US previously imposed a 25% tariff on steel and 10% tariff on aluminum imports from the EU. And while these were subsequently suspended, this suspension only lasts until 2025, and these tariffs could be quickly reinstated. So further tariff hikes on Chinese or global steel imports would bode well for BlueScope’s North Star mill in Ohio. Under our base case scenario, we see BlueScope as modestly overvalued, but there’s upside potential here if Trump forges ahead with the tariff proposals.

The long view

Amidst all the noise, it’s important to remind ourselves of the power of compounding, and the rewards of staying invested. Starting with $1000 at the time of Eisenhower’s inauguration in 1953, you’d have $27,400 today if you’d owned the S&P 500 whenever a Republican was president, and otherwise stayed out of the market. If you’d run the same strategy while a Democrat was in the White House, you’d have $61,800. But if you’d stayed invested the whole time, ignoring politics entirely, you’d have accumulated $1,690,000—dwarfing the wealth of the two market timers. [Exhibit 2]

Exhibit 2: Returns since Eisenhower’s inauguration (1953)

$1000 invested in the S&P 500

Source: Morningstar Over the past 36 presidential terms, from James A. Garfield in 1881 through to Joe Biden, valuations are a much better predictor of returns than the party occupying the White House. Morningstar finds party affiliation accounts for less than 1% of the variability in US equity market returns across presidential terms. However, the starting valuation of the market explains almost 18% of the differences in returns across presidential cycles [Exhibit 3].

Exhibit 3: Starting valuations more important than party affiliation

% explained (R-squared)

Note: Shiller’s Cyclically Adjusted Price-to-Earnings (CAPE) Ratio is used as the proxy for market valuation. Source: Robert Shiller data library, Morningstar Wealth Analysis. At present, both the US and Australian markets trade at modest premiums to fair value. A notable exception for our market is the energy sector, the cheapest under Morningstar’s Australia coverage. Woodside (ASX:WDS) and Santos (ASX:STO), at 48% and 47% discounts respectively, are a big part of this.

Few surprises from the RBA

While overshadowed by events in the US, the RBA left the cash rate unchanged at its November meeting, as widely expected. The bank acknowledged headline inflation had fallen, in part due to cost-of-living subsidies, but made it clear that underlying inflation is what matters. Running at 3.5% annually as of the September quarter, this is still too high to justify rate cuts. In the absence of a material shock to the economy, we can essentially rule out a rate cut in December, the final RBA meeting of the year. There were a few interesting takeaways from the bank’s latest set of economic forecasts, released alongside the rate decision. A subtle revision in the outlook for trimmed mean inflation, the RBA’s preferred measure of underlying inflation, caught my eye. The bank now expects trimmed mean to return to the top of the 2%–3% band by June 2025, from December 2025 previously. The RBA knows how closely the market scrutinizes its forecasts, so I’d be surprised if this change wasn’t deliberate. While modest, it arguably opens the door for cuts a little earlier. It takes time for interest rates to work their way through the system—the ‘long and variable lags’ of monetary policy—meaning policymakers must be forward-looking. Accordingly, the RBA doesn’t need to wait until inflation returns to target to begin easing, it just needs to be confident it will get there. Bringing forward the timing in which the bank expects to achieve its target makes it easier to justify cuts in the first half of 2025, should the economy unfold as expected. Of course, these forecasts were finalized before Trump had cemented a second term. And at the time of writing, we still have a US Federal Reserve decision pending before we can close the book on a huge week for global markets.