As investors try to decode the potential impacts of Donald Trump’s return to the US presidency, we have seen different market sectors ebb and flow through November and early December, with later swells driven by dominant narratives around the likely meaning of each of his cabinet nominee picks.
Following the election result, financials, industrials and small-caps all rallied on the basis of deregulation, tariffs and economic growth. Meanwhile, long-dated bond yields moved higher in anticipation of higher borrowing costs and potentially persistent inflation from the imposition of tariffs combined with tax cut proposals.
In the week following the election, the Russell 2000 smaller stocks index shot up 7.7%, but by November 15 it had given up nearly all its gains, returning 1.9%. The S&P 500 also drifted lower, but in a less dramatic fashion, showing the relative importance that Trump’s policies seem to have for small-cap stocks.
Subsequent waves of investment have not been as uniform as the market’s first knee-jerk reaction. They have instead responded to announcements of Trump’s picks for cabinet posts.
Trump’s choice of Robert F. Kennedy Jr. for the Department of Health had a mixed response. Healthcare stocks in the S&P 500 fell hardest from their post-election highs, led by vaccine stocks, as Kennedy has voiced scepticism over their efficacy. He has also opposed the power of big pharma in the US, making an already expensive sector difficult to have a clear view on.
Demographic trends in the US point to a continuing tailwind for healthcare-related companies, as the ageing population requires support. But selectivity is required should Kennedy be confirmed by the Senate. The S&P 500 Healthcare sector is marginally down now since the election, making it a large relative underperformer against Consumer Discretionary (+12.3%), for example.
Other waves of market sentiment are less clear. Elon Musk and Vivek Ramaswamy’s Department of Government Efficiency may struggle to eliminate the $2trn of spending the billionaires claim they can cut: $4.2trn of the $6 trn budget is used for things like social security and interest payments which are essentially off limits. Options for the axe are mainly civil service budgets, education, Medicaid, highways and roads.
However, incentives for construction and factories are essential for onshoring, economically stimulative and already underway. Making cuts here is counter to Trump’s own agenda. They would likely focus on green subsides rather than touching the bulk of the acts passed under Biden.
Legislation will be required to make changes and, as many subsides are in red states, this may limit the popularity and achievability of a large-scale rollback. The $2trn of ready-made infrastructure stimulus from the Biden administration still looks like a huge boost to companies providing construction site preparation, electrical and mechanical engineering.
Enter hedge fund manager Scott Bessent as Trump’s pick for treasury secretary, whose announcement brought calm to the rising tide of bond yields, as he is seen as relatively orthodox compared to Musk and Kennedy.
His letter to partners at Key Square Capital Management sent out in January 2024 shows a broad bullishness for Trump’s economics, but also a recognition that rising long bond yields pose a risk to any roaring Trump-fuelled economic growth. The market must also have read his letter, as it acknowledged his economic rationalism, sending home builders up over 6% and correcting this post-election sector anomaly.
Bessent’s hedge fund is named after a chess concept, so he is a strategic thinker. He has said tariffs are a loaded gun that is rarely discharged. Even with Trump’s cavalier approach to policy making – the latest threat being immediate tariffs on Canada and Mexico – Bessent may well prevail, using the threat of tariffs as just one piece in the game.
The Key Square letter also reveals an appreciation of former Japanese prime minister Shinzo Abe’s economics. In reference to Abe’s three arrows policy, Bessent has coined his own 3-3-3 approach: a budget deficit of 3% of GDP (6.4% this year), 3% real GDP growth (2.8% for the third quarter this year) and additional production of 3 million barrels of oil a day (currently 13 million).
This rhetoric is likely to appeal to Trump, a man who thinks in slogans. But Bessent also needs to appeal to his transactional nature. Trump’s self-worth is tied to the art of the deal. If Bessent can prove his value in the tactics of trade policy, then the pair may well achieve the classic Republican cocktail of deregulation and tax cuts to achieve real GDP growth. The deficit will be managed by having private sector investment replace government spending.
At the end of November, the S&P 500 and Russell 2000 recovered their post-election highs, suggesting that the market’s confidence in Trump is taking hold and the relative strength in banks, industrials and small-caps is very much intact.
Dan Scott Lintott is an investment analyst at De Lisle Partners. The views expressed above should not be taken as investment advice.