Analyzing market dynamics post-Trump victory: Insights from David Tulk

Market reaction to Trump’s win

David Tulk points out that the market reaction to Trump's victory has been pronounced, with equity markets rallying, bond yields climbing, and the US dollar strengthening. This response is attributed to the pre-election uncertainty dissipating, revealing a clear outcome that the markets can react to. Tulk highlighted that markets were preparing for a different outcome, with some polls suggesting a Democratic shift.

Despite this unexpected result, it is important to note that the full landscape of political power in Washington is not yet settled. The control of the House of Representatives is still undetermined, which could influence the extent of policy and legislative effectiveness in the upcoming years.

Inflation and the Federal Reserve

The Federal Reserve's meeting coinciding with the election week adds additional complexity. Tulk underscores that the Fed had prepped markets for a 25 basis point cut, following a more substantial 50 basis point cut at the previous meeting. This reflects the Fed’s confidence in being able to manage inflation without inciting a rebound.

Tulk anticipates that more fiscal spending is likely, regardless of a Republican or Democratic win. This fiscal activity could reduce the necessity for further monetary accommodation by the Fed. He concludes that the overall strength of the US economy, coupled with fiscal stimulus, supports a scenario where the Fed may not need to pursue aggressive rate cuts.

Regulation and trading

A potential Trump administration is expected to be more business-friendly, a sentiment clearly reflected in market reactions. Tulk expresses concern that a looser regulatory environment in the US could make it more attractive for US businesses over Canada. This competitive dynamic may shift capital and growth prospects southward, underscoring the need for Canada to adapt and find its niche within this evolving landscape.

Tulk also notes the risk of indirect impacts on Canada in terms of energy policy shifts. Trump's focus on energy independence could displace traditional Canadian energy exports, further exacerbating Canada’s existing economic challenges.

Fixed income market

Tulk emphasizes a nuanced approach to asset allocation, the current strategy leans towards an underweight position in duration and a preference for spreads sectors within fixed income. He highlights the lingering risks of inflation, suggesting that market expectations for additional rate cuts by the Federal Reserve might be overly optimistic. In this context, Tulk favors high yield, floating rate notes, and emerging market debt, both in hard dollars and local currency, which may offer opportunities for enhanced yields and potential cyclical tailwinds. His strategy is rooted in a balanced outlook, ensuring that fixed income portfolios are positioned to navigate the evolving economic landscape effectively.

Isolationism and geopolitical risks

Tulk suggests that Trump's trade policies, particularly regarding higher tariffs on China, might lead to increased stimulus from Chinese policymakers in an effort to counteract these additional economic headwinds. This could temporarily boost Chinese economic activity and make emerging markets more attractive from an investment standpoint.

However, Tulk remains cautious about the broader implications of a shifting trade landscape on global markets. The ongoing trend of deglobalization, which started during the financial crisis and has accelerated due to various geopolitical events, casts a long shadow on international trade, with regions more exposed to trade being particularly vulnerable.

US deficit

Addressing the implications of Federal spending, Tulk emphasizes that the current level of fiscal irresponsibility in the US is unsustainable in the long run. Historical patterns suggest that countries with large debt burdens cannot simply grow their way out or cut sufficiently—eventually, inflation becomes a necessary tool to manage these debts.

With inflation potentially running higher and more volatile, Tulk believes that this scenario alters the investment landscape. It demands a more innovative approach to risk management, particularly in maintaining effective diversification and using tools like currency adjustments and liquid alternatives to shield portfolios from negative stock-bond correlations.

Final thoughts