US Election aftermath: Why market enthusiasm for Trump has stumbled

The initial, almost euphoric reaction in US equity markets to Trump’s victory in the US election stumbled badly last week. The widely followed Nasdaq 100 index closed Friday down almost 4% from the post-election highs and less than 1% higher than where it closed on Election Day, before the election result was known.

Yes, some sectors that responded especially well to the strong Trump victory and Republicans securing control of both houses of Congress are still much higher than before the election, but the ugly action last week in the market suggests a sharp change of tone.

This week, I look at the possible reasons for the sudden caution after the initial positive reaction to the election outcome. I also ask two key questions that investors will want answered as we seek to understand how the incoming Trump administration will shape global markets in the months ahead.

Why did the market suddenly turn sour on Trump last week?

The market suddenly got far more selective in its enthusiasm for the coming Trump administration late last week, with Friday seeing an ugly sell-off that erased a large portion of the post-election rally. Some sectors like banks and airlines that most agree would benefit from deregulation under the new Trump administration were almost completely unscathed. But the broader market, especially big tech and many of the Mag 7 stocks, but also small caps, saw an ugly reversal.

What was behind the move? Some argue that it might have been as specific as Elon Musk speaking out against the candidate formerly most favoured to become the next Secretary of the Treasury, Scott Bessent. Trump’s choice for Secretary of Treasury is especially critical due to the terrible state of US government finances. Bessent is seen as a strong choice by the market, as he is not an academic but an experienced hedge fund billionaire. But Musk and Robert F. Kennedy Jr., who Trump appointed as the next Secretary of Health and Human Services, argued late last week that another top candidate, Howard Lutnick, is a better choice. Lutnick is the CEO of financial services firm Cantor Fitzgerald and has been a strong Trump supporter and has spoken very favourably on Trump’s plans to impose tariffs on US trade partners. Trump could also go with another candidate than these two, but this is one of the most important decisions the president-elect will make.

But there are other possible sources driving market unease as we look ahead at the incoming Trump administration. To name a few:

Controversial choices for his cabinet and other positions. Many of Trump’s choices for key government and cabinet positions have raised little controversy, but others were extremely controversial. Specifically last week, Trump announced choices for Attorney General, Secretary of Defense and Director of National Intelligence that seemed almost designed to outrage the Washington establishment. In particular, his nominee for Attorney General, Matt Gaetz, was seen as completely unserious and perhaps a way to reward a loyal ally who was probably about to get kicked out of the House of Representatives on ethics violations. Can a president enjoying controversy and provocation guide the country effectively? Such moves risk the loyalty even within the ranks of his own party, which brings us to the next point.

Very narrow Republican control of the House. The Republicans will control both houses of Congress in at least the first two years of Trump’s presidency until the 2026 mid-term elections. Control of Congress is key for a US president to have any hope of passing major new tax-, spending and other legislation. But Republicans will have an extremely thin majority of just a few votes in the 435-member House (the full outcome is not yet decided due to a few very close results). This means that extreme party discipline will be required at all times, where even a few Republican members failing to fall in line could derail the key parts of his agenda that saw an enthusiastic response from the market when the election result was clear. Trump appointing a couple of House members to key posts makes the majority even smaller until special elections are held next year to replace them.

Will Trump’s agenda prove as positive for the economy as hoped? While there are clear growth-positive elements to Trump’s agenda of cutting taxes and deregulating key industries, the market is right to be concerned about other parts of his agenda. Among these are the general risk that the world will rebel against financing ever greater US budget deficits, sending interest rates soaring. Large tariffs and mass deportations of illegal immigrants are widely flagged concerns as well, likely to disrupt many industries and raise prices, even if some in the economy would benefit. And then there is the possible role of the “tech bros”, something we delve into below.

Trump 2.0: Two key questions as markets second-guess the initial reaction

Will the “tech bros” get their way and slash government spending?
This election cycle saw many of the most powerful billionaires moving to either avoid sounding critical of Trump or to even go all in on his side. None has been louder in support of Trump than Tesla’s Elon Musk, whose massive donations to Trump’s campaign saw him appointed co-head of a new government Department of Government Efficiency. Tesla’s stock has also rocketed higher since Trump’s election win, rising over 40% at one point and making Musk some USD 80 billion wealthier in the process. A Bloomberg story on Monday suggested Trump’s team is looking to create new framework on a federal level (rather than a state-by-state level) for self-driving vehicles like those Tesla aims to produce. Clearly, money buys influence as it always has – but how deeply will the “tech bros” like Musk influence the Trump administration? Musk has said that USD 2 trillion could be trimmed from the US government expenditures (the annual budget will be around USD 7 trillion next year). Most believe that cuts on this scale are impossible, but government spending is an important driver of economic activity, and any significant cuts to spending, if they do see the light of day, would impact growth negatively in the near term.

Does Trump misunderstand his popularity and overreach from day one?

This is the first time in the last three elections that president-elect Trump has received a majority of the popular vote and there is no doubt that the election has given him a strong mandate relative to 2016. But could Trump take things too far as he takes the reins of power for the second time? The mistake Trump might make is to believe that the election outcome is an unconditional endorsement of his personality, way of leading and positions on all fronts. What may have handed him the victory at the margin were a couple of percent of the vote that wanted to vote for Kennedy but voted Trump when Kennedy endorsed him. And even more so, Trump may have won chiefly on the association of Biden and Harris with the high inflation of 2021 and 2022. It’s worth pointing out that the Republicans were also in favour of the huge giveaways that stoked that inflation. In late 2020, Trump asked for a USD 2,000 stimulus check rather than the USD 600 that was eventually approved. Large tariffs and the huge deportations of illegal immigrants could risk stoking a powerful new inflationary wave for goods and labor prices and make the already unpopular Trump even less popular in a hurry. The party in power gets the credit for what happens next, for better or worse.

 
John Hardy is Chief Macro Strategist, Saxo