The market remains attentive to the political, economic and sustainability measures that the new United States government may carry out in the coming months
November 19, 2024
The topic of the week:
Donald Trump finally achieved victory in the United States presidential elections much more decisively and quickly than expected. In fact, the victory of the Republicans has been total, since they also take the senator and the House of Representatives. Election day left important events in the background such as a new rate cut by the FED, the government crisis in Germany or a new stimulus plan in China, and caused a strong reaction from the equity markets that returned set all-time highs, while bond yields rebounded. Such a clear victory should pave the way for implementing those announced in the electoral campaign, however we will still have to wait a while to know which policies will actually be implemented, and which others were part of the campaign, in the context of a strategy. classic “negotiator” to which Donald Trump has accustomed us.
Proposed Economic Policies
- Tax Cuts: reduction of the corporate tax rate from 21% to 15%. This measure could benefit companies, but also increase the fiscal deficit.
- Tariff Increase: possible tariffs of 10% on all imports and up to 60% for Chinese products. This can generate tensions at a geopolitical and commercial level, as well as higher levels of inflation. Directly it would be beneficial for local American industry, but indirectly it would be negative for the global economy, especially in Europe (Germany) and China.
- Immigration Policy: drastic reduction in immigration, which would affect a labor market that has presented certain imbalances between supply and demand in recent times.
- Less Regulation: especially in key sectors such as the financial sector or the oil and gas industry.
- Energy Policy: favoring polluting industries to the detriment of clean energy.
Mitigators to the Proposed Economic Policies
Many of the measures proposed by Trump during the election campaign could directly or indirectly have important effects on the economy, which could ultimately cause some of the proposed policies to be softened:
- Inflation: several of the measures proposed by Trump, such as the imposition of tariffs or cuts in tax rates, present a risk of increasing inflation levels. The FED could be forced to tighten its monetary policy, or at least slow down the current trend of lower rates.
- Effects on the global economy: restrictive trade policies could favor some sectors within the United States, but they would indirectly cause a global economic cooling, not taking into account the geopolitical risks derived from Trump’s aggressive policies. This is one of the main points that present the greatest uncertainty regarding the intensity of the measures that will be implemented, or if in the end they remain as electoral campaign advertisements.
- Fiscal Deficit: Trump proposes lowering taxes and continuing to increase spending, which translates into an increase in the public deficit. Estimates speak of an increase of nearly $8 trillion (with Kamala Harris an increase of around $4 trillion was also expected), in a context in which the United States debt already reaches $35 trillion. At this point, Trump could face opposition within his own party, as several congressmen have already announced that they are not in favor of raising the state debt further.
Possible Consequences for Sustainable Investment
- Inflation Reduction Act (IRA) at risk: This is key legislation aimed at promoting the transition to renewable energy and reducing greenhouse gases (tax credits for clean energy projects and more than $400 billion invested in infrastructure). Trump called them “the green scam,” but 60% of these projects are located in red states, and in general, solar and onshore wind energy projects are well established in the American Midwest, with support from both parties. 18 congressmen from that party have already publicly opposed changes in the IRA.
- Possible exit from the Paris climate agreement.
- Electric vehicle: the new government could withdraw explicit support for the sale of electric vehicles.
- Removal of the restrictions that Biden imposed on oil extraction from federal lands: both on land and in water. That would be good news for oil companies.
- Activate the export of Liquefied Natural Gas (LNG): Biden had stopped this practice.
- Cancellation of Offshore wind projects (at sea): Trump has been very critical during the campaign of all the projects that were being prepared on the East Coast.
- Stop the closure of coal-dependent electricity generation plants: even consider opening new polluting plants, given the need for energy derived from the new needs due to the development of AI.
In terms of pure economic activity, the American labor market showed a certain cooling in October, since only 12,000 new jobs were added, well below the 110,000 that were expected (additionally, they revised downwards the figures for the previous two months, -31,000 September and – 81,000 August). The unemployment rate once again reached 4.1%, maintaining its increasing trend, but still far from historical averages. Inflation data were mixed: personal consumption expenditure (PCE) fell from 2.3% to 2.1% at a general level and remained at 2.7% at an underlying level, maintaining the disinflationary path of previous months. but the CPI data that was published last week rose from 2.4% to 2.6% at a general level, remaining at 3.3% at the underlying level.
The FED, for its part, lowered rates again at the meeting on November 8, this time by 25 bp, to the range 4.50%-4.75%, maintaining the adjustment phase in its monetary policy that began in September. Powell highlighted the good progress of the economy, as well as the positive evolution of inflation, and a new 25 bp cut in December was given a very high probability. The published macro data such as the PCE, or GDP growth, which grows less than expected, but remains positive (2.8% vs 3.0%), undoubtedly reinforce Powell’s speech. From the FED they wanted to make it clear that their policies are going to be independent and will not be influenced by whoever is the president of the government, although they warned that they would have to make decisions in the event that certain policies announced by the presidential candidates were approved. in the future.
In Europe, the European Central Bank lowered 25 bp in October for the second consecutive time, leaving the deposit rate at 3.25%. Lagarde spoke of maintaining a neutral rate policy (so new drops are foreseeable), even more so taking into account that the economic situation in the eurozone was already worrying, and Trump’s victory could increase this situation due to the imposition of trade restrictions. in the form of tariffs.
Beacon of the markets:
The behavior of stock markets globally went from more to less throughout the past week. Once a strong government by Trump has been assimilated, the market seems to focus on the potential risks it will face in 2025. With valuations that are at least demanding after a spectacular year on the stock markets, it seems that for a few moments caution is winning land.
After the beginning of the week that led to setting new historical highs for both the S&P 500 and the Nasdaq 100 (6,017.31 and 21,182.03 points respectively), the weekly close occurred with falls for both indices of -2.08% and -3.43%. For its part, in Europe the market was much calmer since the falls had already occurred days before. Thus, the Euro Stoxx 50 fell -0.16% while the Ibex 35 rose +0.73% thanks to the good session on Friday.
The debt markets had a similar behavior: in the US, the 10-year Treasury saw its profitability increase by 13 bps to 4.44%, while in Europe the debt fell slightly, -1 bps for the Bund and – 5 bps for the Bond that closed at 2.35% and 3.05%. The disparate behavior is based on the different expectations of interest rate movements by the FED and the ECB. The European Bank still has plenty of room (and need) to lower rates in order to relaunch the European economy, while the FED could be forced to significantly slow down its monetary relaxation, due to the country’s good economic health and the potential risks of rising inflation if all the measures announced by Trump in the election campaign were carried out.
In the raw materials market we find price drops, for reasons similar to previous weeks, the rise in bond yields has taken its toll on gold, which lost 4.63% in the last 5 days, its worst week since 2021 , and Brent dropped 3.83% due to i) China’s economic weakness reflected in OPEC’s forecasts and ii) the relaxation of tensions in the Middle East, since it does not seem that the Iran-Israel conflict is going to go away. even more in the short term.
At a macroeconomic level, it is worth highlighting the slight improvement in China, whose industrial production grew by 5.8% and the unemployment rate fell to 5%. In Europe, GDP (provisional data) stood at +0.9% estimated, with industrial production declining -2% (-1.3% expected) and in Germany the ZEW index stood at +12.5 compared to the estimate of +20.5. The early elections could further affect the European locomotive that cannot start. In the US, for their part, they learned i) the CPI data, as expected, increased by two tenths to 2.6% while the underlying data remained at 3.3%, ii) sales Retailers minimally improved forecasts by growing +0.4% in October, a new sign of economic strength and iii) employment data remains solid, with subsidy demands that were in line with expectations.
Throughout this week we will find out if the Chinese authorities alter the interest rates for preferential loans, although they are expected to remain unchanged after the downward adjustment at the last meeting. In Europe we will know the CPI data that is expected to remain at 2% along with the preliminary PMI data. Finally, in the US, housing sales data (up), PMIs (provisional) and the Philadelphia FED manufacturing index will be published.
We conclude with the review of the evolution of the third quarter results season of the S&P 500. 461 companies have already presented with an average EPS growth of 8.5%, compared to the initial estimate of 5.1%, that is, , positive surprises accumulate that exceed 75%. Nvidia’s results will be known on Wednesday.
The phrase:
And we say goodbye with the following phrase from Simon Sinek, English writer, known for his concept of «The Golden Circle»: «Genius lies in the idea, but the impact comes from the action» (we can have very good intentions or brilliant ideas , but if we do not put them into practice, they will not cause significant change).
Summary of the behavior of main financial assets (11/18/2024)
This report does not provide personalized financial advice. It has been prepared independently of the particular circumstances and financial objectives of the people who receive it.
This document has been prepared by Portocolom Agencia de Valores S.A. for the purpose of providing general information as of the date of issuance of the report and is subject to change without prior notice. Portocolom Agencia de Valores S.A. does not assume any commitment to communicate such changes or to update the content of this document. Neither this document nor its contents constitute an offer, invitation or request to purchase or subscribe for securities or other instruments or to make or cancel investments, nor can they serve as the basis for any contract, commitment or decision of any kind.
The information included in this report has been obtained from public sources and considered reliable, and although reasonable care has been taken to ensure that the information included in this document is neither uncertain nor unambiguous at the time of publication , we do not represent that it is accurate and complete and it should not be relied upon as if it were. Portocolom Agencia de Valores S.A. assumes no responsibility for any loss, direct or indirect, that may result from the use of the information offered in this report. Behaviors of variables in the past may not be a good indicator of their results in the future.