Markets on the rise as Trump’s victory brings certainty
Global tariffs! A tax cut boom! Trade war! As president-elect Donald Trump’s inauguration approaches, bulls and bears wage war over what his combination of allegedly pro-growth tax plans and protectionism means for world stocks. Bears believe the ASX’s climb since election day is like dancing blindfolded on the Bunda Cliffs, with tariffs set to hit hard. Bulls say the post-election rally proves Trump is great for markets.
Slow down. While I don’t have my formal 2025 forecast finished yet, all this fear and cheer is overdone. Let me explain.
People frequently fear post-election crashes, largely from biases about the winner. But US stocks usually rally post-vote – regardless of the winner. America’s S&P 500 rose in two-thirds of the 24 periods between election eve and year-end since its 1925 inception. Exclude the five years with long pre-existing bear markets and stocks climbed in 84 per cent of them, 16 of 19, averaging 3.6 per cent in US dollar terms.
Why? For stocks, politics is less about policy and chiefly about uncertainty trends. Rising uncertainty discourages risk-taking (bearish). Falling uncertainty enables it, giving investors and businesses the clarity needed to plan longer (bullish). The latter is America now – a tailwind extending 2024’s gains. Your presently unscheduled 2025 federal election likely sends uncertainty up beforehand … falling thereafter.
Australia’s floating election schedule – and the last decade’s leadership spills – makes this effect hard to see. But in America, it is clear. Uncertainty usually rises early in election years, amid extreme campaign rhetoric. This limits those years’ average first-half market gains to 2.8 per cent (in US dollars). In those years’ second halves uncertainty falls as primaries end, nominees name running mates and form policy platforms, polls predict likely outcomes – and US stocks average 9.2 per cent in US dollars.
Uncertainty was unusually low early this year given how well-known Trump and President Biden were, bringing above-average returns. Biden’s exit stirred faltering summer uncertainty. That faded fast – hence, strong first and second-half returns. Post-election, stocks advanced immediately. Then congressional outcomes crystallised, favouring Republicans – reducing uncertainty further. Initial administration appointments, too. Yet Congressional margins are slim, hampering major bills. It isn’t bullish gridlock. But it is close. And it is all falling uncertainty, powering US stocks. That bullish tailwind normally spills out globally. For that, consider correlation, a measure of how closely two assets wiggle together. The ASX’s correlation to the S&P 500 is 0.68 over the last 20 years – strong, given 1.00 signals identical movement and -1.00 polar opposite. Unsurprisingly, the ASX’s rise since November 5’s vote parallels America’s.
Yet bearish takes on Trump abound, often citing his threats to impose tariffs on all US imports. Prime Minister Anthony Albanese believes Australia will be exempt. China won’t be. Trump seeks higher tariffs there – 60 per cent or more. Albanese says this puts Australia at the crux of a “strategic competition”. Since China is our largest trade partner, over 30 per cent of Australian exports, pundits believe tariffs will hammer China’s exports, indirectly impairing demand for Aussie goods.
But we saw this movie before … in 2016! Trump entered office threatening NATO and China tariffs, exiting Trans-Pacific Partnership (TPP) talks, and scrapping the North American Free Trade Agreement (NAFTA). He yakked up European auto tariffs. And?
Stocks jumped globally after 2016’s election and rallied through 2017. The ASX rose 11.8 per cent, nearly matching US stocks’ 12.1 per cent (both in Australian dollars). Non-US stocks led globally! The ASX’s correlation to US stocks was 0.7 during his four years, just like normal.
Why? Tariff and protectionism fears were already priced into stocks. Trump used his rhetoric to strike deals. Yes, he exited TPP talks. But NAFTA? He struck a new deal expanding its scope. China? Deal! No EU auto tariffs emerged. An investment deal did. Positive surprises!
Don’t presume protectionism is his endgame. Maybe he seeks a new TPP. Or a different multilateral deal expanding on 2005’s US-Australia agreement. Do I know what is in his head? No more than Big Macs go into it and whoppers come out of it. But 2016 shows such possibilities aren’t wild.
Even his tariffs didn’t bite hard. Global growth continued until Covid lockdowns. It resumed thereafter, despite the fact that Biden didn’t repeal them.
Trump bulls face a simpler problem: Maths. Miniscule margins mean passing anything big will be tough – including the vast tax cuts. Republicans won a five-seat edge in the 435-seat House of Representatives, historically tiny. And four Senate seats. Trump needs his party to vote in lockstep to pass divisive laws. They haven’t in decades.
My 2025 forecast will appear here soon. US politics will be part of it. But calm down – 2025’s stockmarket outcome won’t centre on who wins the Trump fear-versus-cheer tug of war.
Ken Fisher is executive chairman of Fisher Investments.
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