Market update

Back to the future.

Donald Trump has been elected President again. TV networks called the race at around 5:30am ET and the Associated Press (AP) called the race shortly after. A win in Wisconsin put him over the 270 electoral college vote threshold.

The market is responding how we would have expected in the event of a Republican sweep – U.S. large cap stocks, small cap stocks and bond yields are all sharply higher.

S&P 500 futures are up another +2.3% on top of yesterday’s +1.1% gain. Yesterday, all 11 sectors were higher breadth was the best since August (87% of constituents finished higher).

Small Cap stock futures are up +6.5% on top of yesterday’s +1.9% gain and at one-year highs. The CBOE Volatility (VIX) index (a measure of implied volatility) is collapsing about five basis points because the election outcome became clear so quickly. On the other hand, Hong Kong’s Hang Seng index is down around -2.5% from yesterday’s highs.

Bond markets are reacting strongly to the move. 10-year yields are up 16 basis points to 4.43%. The yield curve is steepening. 2-year yields are “only” higher by eight basis points.

In commodities and currencies, gold is down slightly this morning (-0.8%) $2,744 per ounce, as is oil ( -1.25% to $74.50 per barrel). Bitcoin is trading at all-time highs and has gained 10% over the last two days.

The key takeaway from the price action is that markets are more focused on the pro-growth policies rather than the risks of tariffs or increasing deficits. Bond yields are higher, but so is the dollar, and risk markets are performing exceptionally well. Sectors who are exposed to regulatory risk like small cap banks are also performing well. If deficit concerns were the focus, the dollar and stocks would be weakening as bond yields rise.

Your election recap 

President Donald Trump is on track to win every swing state. Republicans have won control of the Senate, and while the House of Representatives is still officially a toss-up, markets seem to think Republicans will win a slight majority. There are still 60 seats outstanding in the House and it could take several days to a week to declare winners in all of the outstanding races.

Even if Republicans do end up winning the House, it seems like their margins will still be slim. That means that negotiation and compromise will still be necessary for major policy proposals. Here is an updated look at the key issues.

On taxes: While there is still a long way to go in Tax Cuts and Jobs Act (TCJA) extension negotiations, it seems like the “worst-case” market outcomes may have been avoided (e.g. higher taxes on capital gains, quality dividend treatment and tax exemption of municipal bond income). That said, a full extension of the TCJA may not be palatable to members of Congress who are worried about the deficit. The provisions of the TCJA won’t expire until the end of 2025, so we wouldn’t expect decisions to be made until the back half of next year.

If fully extended, personal tax rates will stay at current levels outlined in the chart below.

On trade: President Trump has proposed an increase on tariffs to 60% on all Chinese goods and up to 10% on all other imports. While higher tariffs on China seem likely, the broad tariffs on all trading partners face much higher legal hurdles. The dollar is strengthening this morning as markets perceive that tariffs will extend “U.S. exceptionalism.”

On immigration: The President does garner relatively more power when it comes to immigration policy. President Trump has proposed much stricter immigration measures and an effort to deport asylum seekers. We should expect for immigration to slow at an increased pace. Though, it is notable that during Trump’s previous presidency, he called for the deportation of 11 million immigrants, which only resulted in about 300,000 deportations per year from 2017 to 2020.

On the deficit: We said that regardless of the candidate elected, deficits will likely increase. As Michael Cembalest pointed out in his paper, Mind the Gap, President Trump’s policies as proposed would increase the deficit by about 4 trillion. As previously stated, tight margins in the House and Senate will provide a buffer against this type of deficit expansion. That said, the move in bond yields suggests looser fiscal policy, better growth prospects, a higher landing place for the Fed and higher inflation.

What we think:

• More positive:
  • U.S. Equities versus rest of the world. We would add cyclicality through Tech, Industrials and Financials.
  • Gold and real assets (infrastructure, real estate, etc.)
  • U.S. dollar
• Neutral
  • Despite the backup in rates, we would stay neutral duration.
• Less positive:
  
  • U.S. healthcare, staples and energy (given a less positive view on oil prices)

What we think: Now that a candidate is confirmed markets can do their job as a forward looking machine. Volatility tends to fall relatively quickly after the new composition of government is confirmed, and on average, equities are higher 12 months after the election.

Said differently, don’t let an election derail your plans – historically, election outcomes don’t drive market returns over the long run. After all, they happen every four years. And since 1950, there have been 18 presidential elections and 10 transitions in the White House between Democrats and Republicans. Over those 74 years, U.S. GDP growth has averaged a 3.2% annual pace, while the S&P 500 has compounded at 9.4% per year. 

All market and economic data as of 11/06/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate funds often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.​

Index definitions:

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
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• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
• International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
• Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
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• Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
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• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
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• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.