Why Donald Trump’s election win fuelled a stock market surge

Following Donald Trump’s victory in the US presidential election, Bitcoin was one of the assets that surged in value. This was widely felt to be a response to Trump’s promise to establish a strategic Bitcoin reserve – essentially holding a large stock of the cryptocurrency as a security. On November 13, the week after Trump’s win, Bitcoin broke through the US$90,000 (£71,340) price threshold for the first time, and the value of the global crypto market topped US$3 trillion for the first time in three years.

US stock markets the Dow, S&P 500 and Nasdaq also hit record levels, with investors expecting to price in Trump’s promises of tax cuts and tariffs, fuelling the dollar and sparking a sell-off in US government bonds. Promises of corporate tax cuts and deregulation tend to encourage financial innovation, making markets more active.

These and others can be defined as “Trump trades” – financial market trends influenced by the president-elect’s win. These trends emerge as investors adjust their strategies based on the economic policies, regulatory changes and geopolitical impact associated with a Trump presidency.

When Trump last became president in 2017, prices for consumer goods had risen almost 5% over the previous four years. By contrast, since January 2021 those same prices are up by around 20%. This is a dramatically different economic backdrop in which inflation has been a global phenomenon since the onset of the COVID pandemic in 2020.

Supply chain issues, shifting consumer spending patterns, the cost of living and other quirks related to COVID lockdowns collided with the 2021 American Rescue Plan Act (a US$1.9 trillion government package to support workers in the pandemic) to send costs shooting higher.

This combination of higher inflation and interest rates could make many of the ideas Trump talks about either riskier or more costly than before, especially as unemployment is very low. When more people are employed, increased consumer demand can lead to higher prices amid competition for goods and services.

But markets are in euphoria territory right now. The word speculator comes from the Latin “speculum”, meaning mirror. Hence, investors and speculators in the US capital market today are simply mirroring Trump’s promises of economic growth and protectionism.

Trump is definitively market and economy-friendly – and this creates short-term surges in stock values. But stocks will stay high only if Trump follows through with a light-touch approach to regulation to scale back some of the reforms undertaken by President Biden’s administration.

Since 2021, the regulatory burden faced by the finance industry has increased. Agencies like Securities and Exchange Commission and Consumer Financial Protection Bureau have introduced enforcement campaigns against financial firms in order to protect consumers from bad practice. This challenged things like private equity deals and cryptocurrency trades.

Trump’s unpredictability and controversial character might seem like red flags for investors. Yet markets often take a pragmatic approach, focusing more on outcomes than personal traits. For example, Trump’s potential trade war with China might spark market volatility. But investors will adapt as they see tariffs as part of a broader strategy to secure better terms for US businesses.

By contrast, even if markets become volatile or fall (as happened with the US bond market in the aftermath of Trump’s win), investors might still see it as an opportunity for profit. Active traders often thrive on sharp market moves, and many investors are selling their long-term treasury bonds ahead of any further rises in long-term rates (bond prices fall as interest rates rise).

Impact on the EU and UK

The re-election of Trump could have significant implications for both the UK and the EU, touching on things like trade, geopolitics and global economic stability.

Trump’s “America first” policies may pose challenges for the UK and the EU in trade relations. The EU could face tariffs, particularly on sectors like automotive manufacturing. This protectionist approach could disrupt European exports and global trade flows.

And the UK, hoping for a US trade deal post-Brexit, may find itself in a weaker negotiating position under a Trump administration that emphasises US dominance.

Under Biden, the US collaborated with the EU on green energy and technology policies. A Trump presidency, with its rollback of environmental regulations and scepticism of international agreements, could undermine these efforts.

For Europe, this might mean losing a key ally in global climate initiatives, forcing the bloc to recalibrate its strategies for addressing climate change and advancing technology. It may also escalate tensions around tech regulations, especially if Trump’s policies align with figures like Tesla boss and Trump’s incoming efficiency lead Elon Musk, who often clashes with EU regulatory frameworks. In this sense, Musk can be seen as a financial risk factor.

Under a Trump administration, the combination of tariffs, climate policy rollbacks, and geopolitical dynamics could have significant implications for investors. Tariffs and sanctions often trigger sell-offs in affected sectors, but can create opportunities for speculators, who often anticipate these moves.

For example, hedge funds in the US ahead of Trump’s victory began short selling energy and renewable stocks. They gained US$1.2 billion once the value of their shares fell sharply over concerns that tax credits for green energy will end.

Despite Trump’s rhetoric, markets are underpinned by uncertainty rather than undermined by it. Uncertainty is after all the main source for profit in our western model of capitalism.

It is also true that markets care about tangible actions, and Trump seems determined to deliver on his promises. But only time will tell whether his economic agenda is merely wishful thinking.

Trump has only four years as president and he is in a hurry to move forward with his economic agenda. The chances are that at least some of his economic policies will have a sugar-rush effect and cause markets to surge before their impact fades away once higher interest rates slow the economy.

This article first appeared in 'The Conversation' on 20 November 2024