The American election in review

Sébastien: Welcome to the “In Your Interest!” podcast. My name is Sébastien Mc Mahon. I'm chief strategist at iA Financial Group, and today we're doing episode two about the U.S. election, following the first episode that came out in early October. And again today, I'm welcoming my colleague Alex Bellefleur, Senior Vice-President, Head of Research and part of the Asset Allocation team. So, hello, Alex!

Alex: Hi, Sébastien. We're back! Happy to be back!

Sébastien: We're back and we have more certainty now. We were wondering when we would be doing the second episode. It could have taken a few weeks, maybe a few months before we had the result of the election, but that was not the case, right?

Alex: Yeah, this was a lot quicker than we expected. I expected I would go to bed very late the night of the election, and to be honest, I was in bed by 11 p.m., which is good for my sleep, but it definitely shows that the result of the election was much more decisive than pretty much what anyone had anticipated.

Sébastien: Yeah! Smart move! I think I was in bed at like 10:15 that night. A bit anticlimactic. But still, we're ten days removed from the election today. We're recording this on November 15, and I would love to ask you, since we've been digesting those results, what do you think was the biggest overhang, let's say, of the election, from the point of view of the financial markets and the economy. So, what was the biggest surprise for you?

Alex: Yeah, so I would say the biggest surprise – and I'll speak obviously from an economic and from a market point of view – the biggest surprise was really the margin of victory or the extent of Trump's victory and the Republican sweep. If you had asked market participants before the election, I think most people would have said, “yes, Trump will win,” but most people would have also said that Congress would be divided and that the win would be very close. And as we mentioned earlier, I think a lot of people thought it would take a few weeks to really untangle all the election results and have a decisive victor from the election, and that really was not the case. We saw pretty early on in the evening of the election that pretty much every region, every county in the country, swung in favour of Trump. He was scoring, you know, he was polling better than he had been in the 2020 election. And so very early on in the evening, that became obvious. And so, the market reacted in a very decisive way and priced what was left to price in the Trump sweep. So, over the last few weeks of the election campaign, you saw certain equity market sectors, certain currencies that were poised to do well in a Trump presidency based on the Republican agenda. You saw those sectors and those currencies, and those assets outperform in the market. And the very night of the election, when it became more and more obvious that Trump was winning, and was winning in a decisive manner, those trends really got exacerbated and amplified overall. So, what does that mean? Well, it means, you know, pricing in trade tariffs with certain trade partners like China, equity sectors like banks, for example, that are seen as doing better from a deregulatory agenda. And so that's really what happened from the market point of view.

Sébastien: So now the markets have been reacting to the Trump election itself. But the next wave of reaction should be about who Trump appoints at key positions.

Alex: You're absolutely right. The second part of the reaction to the Trump election, I would say, was the week following his election. You started to hear some deliberations surrounding appointments to Trump's cabinet, so people began to speculate over who would be Treasury Secretary, who would be Secretary of State, and we're still in this phase, I would say. We're recording this on November 15, and we have a good idea of who will be in Trump's cabinet at this point. We're still waiting for the Treasury Secretary, but if we step back and look at if there's a common theme in those appointments, it's a very MAGA cabinet overall compared to the first Trump election. In 2016, he had some people in his cabinet that were not necessarily associated with the MAGA movement, maybe more establishment-type Republicans. He even had Rex Tillerson, who had been a CEO, run the State Department. And this time around, it's very different. It's all very much Trump loyalists. You know, when Trump was in his sort of purgatory after the 2022 midterm elections, where the Republicans didn't do so well, it seems like Trump picked people that supported him through that purgatory. So you have a cabinet that's very pro-Trump, very MAGA, and so you can expect that Trump will be a lot more assertive this time around and will push forward with his agenda. One thing that is obvious as well, in terms of the foreign policy positions, you have appointments that are very hostile to China. So, for example, Senator Marco Rubio, who is now Secretary of State, he's been very aggressive towards China. He has wanted to go after China on the international stage. Representative Mike Waltz, who is now the National Security Advisor, also a China hawk, I would say. So, expect tensions between the United States and China, both on the trade front and on the geopolitical front, to escalate from here, I would say. But there are also some surprises. For example, those same people, Marco Rubio and Mike Waltz, they're a lot less hostile to Ukraine, for example, than had been expected. Many people thought that Trump, you know, would want to end the war in Ukraine by simply stopping to fund Ukraine and giving Russia sort of a good peace deal. You know, that's a little bit in question at this point with people like Rubio and Waltz who have been more supportive of Ukraine. And also, there appeared to have been a relatively constructive first discussion between Trump and Zelensky following the election. So, I would say that's a bit of a surprise as well. So, some trends I would say continued from before the election, but there's some new things that are going to be interesting to watch.

Sébastien: Yeah. And the biggest surprise I think – well, I guess – was how strong a mandate that is. So, Trump won the popular vote, which he didn't do in 2016. In fact, it's only the second time since 1988 that the Republicans won the popular vote. The previous time was George W. Bush in 2004, and he had a lot of support post September 11. And having, you know, as you said, the red sweep, having the Senate and the Congress, that gives him lots of leeway. But now, you know, the question that everyone was wondering was: “Was he going to be putting like hawks in key positions or moderates?” Now we're getting those answers. So, when we look forward now into 2025, I guess that gives us a clearer picture of what we can expect. So likely, the things that we've heard Trump mention on the campaign trail are maybe closer to reality now. How would you see Trump's term in office from the point of view of the economy and the markets going from now?

Alex: So, one key theme that I think will come to a head pretty soon in his mandate is the clash between Trump's fiscal and economic proposals and the ability of the bond market to absorb additional debt issuance overall. So, if you look at Trump's key policy proposals, he wants to deregulate very large parts of the economy because he thinks that this is going to lead to higher growth and fewer distortions in the economy. And there's good reasons to believe that that might be the case to some extent. But he also wants to extend his tax cuts that he had put in place back in 2017, which sunset in 2025 and have to be renewed. And Trump has said that he wants to not only extend these tax cuts, but he wants to expand them as well. He wants to cut taxes further for individuals and corporations. So, the issue with that is that it will reduce government revenue. And if you look at 10-year U.S. deficit projections from the Congressional Budget Office, it does not look pretty. Overall, currently, right now, the U.S. is running a deficit of about 6% of GDP, which for a time of economic expansion is massive. Normally, in an economic expansion with very low unemployment rates, you should be running roughly a balanced budget or just under a balanced budget. But now you're running massive deficits. And so, Trump's proposals, taken in isolation, would further expand that deficit. Now we're in an environment where inflation has been a little bit higher than in the 2010s, so the bond market might be a little bit more skittish when it comes to those proposals. So, what will be interesting to see is how those discussions surrounding Trump's fiscal plans clash with the market's ability to absorb additional debt issuance. Trump has also proposed some things to cut the budget deficit. He wants to cut spending. He's appointed Elon Musk and Vivek Ramaswamy to the DOGE – the Department of Government Efficiency – and they said they want to cut government spending by $2 trillion. So obviously that's a figure. We'll see if they're able to do that. So, there's some payback on the other side, but it'll be very difficult for them to do that. The other thing that I think will come out pretty early in his mandate is the question of trade tariffs. So, tariffs are pretty foundational to Trump's view of the world or Trump's view of international trade. So, tariffs when you look at how they will flow through to the U.S. consumer, they will increase prices for the U.S. consumer. Now it's not an ongoing effect. It's not something that increases inflation every year, but it's a one-off shock to the price level. What we saw, or definitely one lesson from the U.S. election recently, is that if you want to become unpopular with the electorate, create inflation. I think that arguably, that is one of the things that really sunk Kamala Harris's chance of getting re-elected, that she was associated to the inflation of the Joe Biden presidency overall. So if there are tariffs, higher prices for consumers, how will Trump's favourability ratings respond to that? Will he suffer from it? Will he lose the midterm elections and then lose his majority in the Senate and the House of Representatives? So, this is an issue that's going to come up. And then finally on tariffs, how will America's trade partners react? I don't think that Europe and China are going to just sit there and do nothing as the U.S. imposes massive tariffs on their cars, on their industrial products overall. Is this the beginning of a new Cold War between the United States and China? So that will be very interesting to follow. I think it will create some volatility in markets, but it will also create some opportunities for portfolio managers like us.

Sébastien: Yeah. And to wrap this conversation, so for the markets, heading into the election, we were seeing, you know, stronger odds of Trump being priced in. We did put some hedges in there to make sure that if there were stronger gains on the Democrat side and markets reacted, that, you know, our funds would be well positioned. Now, looking forward to 2025, how do we position ourselves now that Trump has been elected?

Alex: Yeah. So, the greatest danger, I think, in analyzing Trump is to believe that you have fully understood Trump. I think that Trump fundamentally is somewhat unpredictable, and I think that he sees a lot of things as being transactional, and he loves the deal. He's written a book, The Art of the Deal. So, if someone offers him a deal that he thinks is good, or he offers a deal to someone, he might change his mind. He doesn't have necessarily deeply held beliefs, I think. So, I think a big danger is to think that we know everything about Trump, and we can position, you know, for the next four years in a certain way and think that this is going to be appropriate. I think that Trump could go one way, or he could go the other. And for this reason, I think that one key approach to managing money in the Trump era is going to be being nimble, being able to adjust your positioning, being able to do it quickly because I think that things will move relatively quickly. As you said, Sébastien, before the election, one of the things that we were a little bit worried about was that if Trump won, that the bond market would react negatively. And we did put on some hedges in our funds to prevent losses in the event of a big move up in government bond yields. And that actually did happen, and we closed those hedges after. But at the moment, I wouldn't take on any big positions based on what I think Trump will do or will not do, because I think that it could really change. So currently, I would say our positioning is a bit more pro-cyclical. I think the deregulation theme probably has some legs and could continue, but again, we stand ready to adjust that positioning pretty quickly because it seems like the communications from Trump can be relatively erratic and can change pretty quickly.

Sébastien: Yeah. All right. So, 2025 is going to be interesting for sure. So, this is a game changer at many levels, you know. How will global trade evolve from here? How will markets react to that? Will Trump be more predictable than in his first get-go at the presidency? So lots of things to look forward to in 2025. Thank you very much, Alex, for coming here, helping us understand how the U.S. election unfolded, how the world will evolve from here, and of course, what it means for everyone listening here.

Alex: Thank you, Sébastien. I don't think the next few years will be boring, that's for sure.

Sébastien: Yeah, I don't think so either. Thank you to everyone at home. If you have again any questions, you can always reach out to us. And of course, come back again next week!

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