Trump's Return Ignites Market Volatility and Record Highs

Donald Trump's unexpected victory in the 2024 U.S. presidential election sent shockwaves through global markets, triggering a significant rally in U.S. stocks and the dollar, while bond prices tumbled. Investors quickly adjusted portfolios, anticipating a new era of lower taxes, deregulation, and potential trade tariffs under the returning administration.

Market Reaction to Trump's Return

Following the election results, U.S. stock markets experienced a dramatic surge, with all three major indexes closing at record highs. This immediate reaction was largely driven by investor expectations of pro-growth policies.

• Record Highs: The Dow Industrials, S&P 500, and Nasdaq Composite all reached unprecedented levels.
• Significant Gains:
  • Dow: +3.57%
  • S&P 500: +2.53%
  • Nasdaq: +2.95%
• Sector Performance: Financials jumped 6.16%, with the S&P 500 bank index soaring 10.68% due to anticipated deregulation. Small-cap stocks (Russell 2000) rallied 5.84%.
• Volatility Index: The CBOE Volatility Index (VIX) dropped to a six-week low, indicating reduced market fear.

"Trump Trades" and Key Movers

Certain assets and companies, dubbed "Trump trades," saw substantial gains as investors positioned themselves for policies expected to benefit them.

• Tesla (TSLA.O): Shares leaped 14.75%, partly attributed to CEO Elon Musk's support for Trump.
• Bitcoin: Surged to a record high of over $76,000, with expectations of a more lenient regulatory environment for cryptocurrencies.
• U.S. Treasury Yields: The benchmark 10-year note yield hit a four-month high of 4.479%, reflecting concerns about potential inflation and increased government debt from tax cuts and spending.
• Dollar Strength: The dollar recorded its biggest one-day percentage gain since September 2022.
• Emerging Markets: The Mexican peso slumped to its lowest level in over two years, and the euro saw its largest daily drop since 2020, as markets braced for potential tariffs.

Inauguration and Future Volatility

While the initial market reaction was overwhelmingly positive, analysts anticipate a period of increased volatility as Trump's administration begins to implement its agenda. The January 20 inauguration speech is being closely watched for clues on policy direction.

• Policy Focus: Key areas of investor attention include trade, immigration, and regulation.
• Inflation Concerns: Trump's tariff plans could exacerbate inflation fears, potentially pressuring bond and stock prices.
• Regulatory Impact: Efforts to ease regulations are expected to boost sectors like crypto and banking.
• Historical Context: While past inaugurations have typically seen tepid market reactions, Trump's unpredictable nature and direct commentary could lead to more significant swings.

Investors are adjusting their outlook on the Federal Reserve's interest rate path, with some now expecting fewer rate cuts in 2025 due to potential inflationary pressures from Trump's policies. The market's initial optimism has somewhat tempered, with the S&P 500 up about 1% since the November 5 election, as the focus shifts from immediate post-election euphoria to the long-term implications of the new administration's policies.

Sources

• Stocks surge to record highs as Trump returns to presidency, Reuters.
• Trump comeback drives gains in US stocks and dollar, Treasuries slide, Reuters.
• Trump's US presidency return ushers in new era of volatile markets, Reuters.