- The S&P 500 has gained 4%, while the Nasdaq has risen 5%.
- Trump’s policy changes might improve business conditions.
- Markets are eagerly awaiting US inflation figures due on Wednesday.
Equities closed at record highs on Monday as optimism over Trump’s presidential win extended into the fourth day. Investors are buying more stock in companies like Tesla, which will likely benefit from Trump’s reelection. At the same time, his proposal to cut taxes will benefit smaller companies.
S&P 500 index (Source: Bloomberg)
Since Trump won the presidential election last week, risk appetite has surged in the US, boosting equities. The S&P 500 has gained 4%, while the Nasdaq has risen 5%. The Trump trade that was seen after the 2016 election is back. Notably, Tesla’s shares surged due to expectations of a bright future since Trump is a close friend of Elon Musk.
Some of the policy changes that Trump has proposed will improve business conditions in the US. Notably, tax cuts will increase profits for businesses and boost investment. At the same time, his proposals to impose heavy import tariffs on countries like China will allow local businesses to increase sales.
Furthermore, experts have pointed out that the Republican party will control both houses of Congress. Therefore, it will be easy for Trump to pass these policy changes. Faster growth in businesses will eventually translate to high economic demand. At the same time, price pressures will increase, boosting inflation.
In the long run, Trump’s policies might become a big headache for the Fed. Although US inflation is nearing the central bank’s target, it is still not there. Moreover, interest rates are still high. Therefore, if there is a spike in inflation before it hits the target, policymakers might vote to pause rate cuts. However, all this will depend on incoming data.
Last week, the Fed lowered borrowing costs by 25-bps and signalled caution about the future. Moreover, policymakers have noted the recent weak employment figures, which they will monitor. However, there was little reaction to this meeting, which was overshadowed by the Trump win. After Trump’s reelection, markets moved to lower the likelihood of a rate cut in December from 80% to 65%.
Meanwhile, markets are eagerly awaiting US inflation figures due on Wednesday. According to economists, the CPI might increase by 0.2% on a monthly basis. A bigger-than-expected jump would lower December Fed rate cut expectations. On the other hand, if inflation misses forecasts, rate cut bets will increase.
