Despite the very positive reaction of US equities and the dollar to Trump’s victory… there is still a high degree of uncertainty about US domestic and foreign policy, and the policy responses of other regions.
The US election results were the primary driver of market performance in November. Donald Trump’s presidential victory and the Republican party securing a majority in both chambers of Congress fuelled expectations that the next government’s policies will extend American exceptionalism in the economy and markets. The prospect of further tax cuts, expansionary fiscal policy, and the implementation of a more nationalist trade policy boosted US equity markets. Domestically exposed US small caps were seen as the main beneficiaries and gained 11% over the month. With a 62% share of the developed world small cap universe, US small caps made a significant contribution to the MSCI World Small Cap Index’s return of 7% in November.
Growth stocks (+5.3%) outperformed slightly as a weak healthcare sector dragged on the value segment (+3.9%). Concerns about the new administration’s less friendly stance towards the pharma industry weighed on the sector.
Global equities registered a 3.8% gain for the month. Outside US markets, the election result was met with some caution. Emerging markets underperformed developed markets by 9 percentage points. Chinese equities declined due to concerns about a future trade conflict and the assessment that the previously announced government support measures are not yet sufficient to overcome the domestic real estate and confidence crisis.
The US dollar rally also had a significant impact on the relative performance of markets in November. The perception that Trump’s fiscal plans could be inflationary and potentially cut short the Federal Reserve’s (Fed’s) rate-cutting cycle led to the strongest consecutive monthly gains for the dollar in 26 months on a trade-weighted basis. Currency losses contributed to the weak performance of global bonds in USD terms.
Commodity returns were slightly positive between profit taking on precious metals and growing concern about gas supply. A further reduction of Russian gas deliveries to Europe and the surprising closure of a large liquid natural gas (LNG) plant in Australia helped gas prices increase by more than 20% in November.
Equities
US equities outperformed other regions significantly, with a 6% increase. Expectations for de-regulation boosted US financials and the energy sector, while the industrials sector was seen as one of the main beneficiaries from tax cuts and trade policy. The Q3 earnings season was also moderately positive for US equities, with earnings per share growth ahead of expectations at 9% year-on-year.
In addition to the election, positive macro data contributed to the rally. October US retail sales rose by 0.4%, which was higher than expected, and the November Flash composite Purchasing Managers’ Index (PMI) reading rose to 55.3, outpacing the comparable composite PMIs in the eurozone and UK of 48.1 and 49.9 respectively.
Equities in Europe ex-UK fell marginally due to a combination of concerns about US trade policy and earnings warnings from the automotive and consumer goods sectors. Consumer weakness in China and within domestic markets was cited as the cause in both cases. Strong financials performance supported UK equities (+2.5%) this month.
Trade policy risk, combined with the strengthening US dollar and fears of a less supportive US monetary environment, negatively impacted Latin American (-3.6%) and Asian equities (-3.3%). In addition, a strengthening US dollar, fear of an early end to the Fed’s rate-cutting cycle, and thus a less supportive monetary environment in the future, have been major detracting factors for emerging markets over the past month.
Fixed income
Central banks continued to lower rates during November. The Fed voted to lower the federal funds rate by 25 basis points to a target range of 4.50%-4.75%. Progress on disinflation and recent employment data supported the decision to move towards a more neutral policy stance. The Bank of England also cut its policy rate by 25 basis points to 4.75% in an 8-1 vote. Notably, the Bank lifted its inflation projections for 2025 and 2026 following October’s UK budget.
However, bond markets only marginally benefitted, as concerns that Trump’s policy proposals could reignite inflation in 2025 reduced US rate cut expectations to only three cuts in the next 12 months. Therefore, duration added more to bond returns in Europe than in the US. For global bonds, currency movements in November were the largest contributor to returns, reducing performance in USD terms and enhancing returns for EUR and GBP based investors.
October inflation data was also a slight headwind for bond markets as the eurozone Consumer Price Index (CPI) climbed back to the 2% target in October, with energy and food inflation contributing the most. This was confirmed in November as CPI accelerated further to 2.3% year-on-year. However core inflation was stable keeping rate cut expectations in markets unfazed. In the UK, headline inflation rose from 1.7% to 2.3% and core inflation was up from 3.2% to 3.3% year-on-year in October.
Despite resilient inflation numbers, investors continue to expect that weak demand in France and Germany will give the European Central Bank enough justification for further rate cuts. Euro government bonds (+2.3%) outperformed their global peers in local currency terms. Periphery bond markets outperformed as the collapse of the German government added to political uncertainty in core Europe, while French government bonds continued to underperform as budget concerns lingered.
Japanese government bonds continued to suffer (-0.7%) due to expectations of ongoing Bank of Japan interest rate hikes and an accelerated pace of balance sheet reduction in 2025.
A solid growth outlook for corporate earnings kept US high yield spreads tight. The asset class outperformed government bonds in November.
Conclusion
Despite the very positive reaction of US equities and the dollar to Trump’s victory, we have pointed out in our yearly outlook “Pushing the boundaries” that there is still a high degree of uncertainty about US domestic and foreign policy, and the policy responses of other regions. While an ‘America first’ policy stance might lead to ongoing US exceptionalism across asset classes, we’d argue that at a multiple of 22x forward earnings versus 13x in Europe, and 12x in emerging markets, a lot of that relative optimism is already priced in. Therefore, a benign global growth environment justifies a degree of optimism for risky assets but valuations give little room for exuberance.