This week in the markets: weighing up the Trump Bump

Two weeks of political drama is over. Now it’s time to assess what it all means for our investments. The initial reaction was positive, but where next for financial markets? 

Another Trump bump

This time around, investors had a better idea what voters had chosen. Re-electing Donald Trump, with likely Republican control of all three branches of government, paves the way for tax cuts, tariffs, economic growth, inflation, a higher dollar, less immigration and climate scepticism. 

The stock market’s initial reaction was ‘bring it on’. The S&P 500 enjoyed its best week in a year, up nearly 5% over five days. Winners included smaller US stocks - beneficiaries of an America First agenda - energy, financials and one or two individual winners. Elon Musk’s Tesla rose nearly 30% on the prospect of tariffs on Chinese rivals and a hot line to the White House.

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The big question now is whether to chase the Trump rally or assume it has been better to travel than to arrive. History suggests the former. Republican sweeps have delivered positive returns seven times out of eight since 1900. That could help offset the usual shape of the Presidential cycle which sees much better returns in the two years running up to an election than in the two years after.

• Listen: Are investors right to cheer Trump's victory?
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The key measures - earnings and valuations - are a mixed bag. Earnings are rising at 8% year on year in the ongoing third quarter results season, with more of the same pencilled in for next year. But valuations look stretched, at 26 times historic earnings and 22.5 times expected profits.

Much will depend on what happens to bonds. Inflationary policies could keep interest rates higher for longer. The Fed cut rates by a quarter point last week (as did the Bank of England) but if rates stay above 4% this cycle, then fixed income will look a compelling alternative to shares and the two-year-old bull market could start to lose momentum.

Pimco, one of the world’s biggest bond investors, warned us to be ‘careful what we wish for’. Inflationary policies on top of an already hot economy, could lead to overheating and halt the nascent interest rate easing cycle.

Budget boos

Meanwhile over here, investors may have felt they got off lightly when Rachel Reeves delivered her first Budget, but companies are spitting tacks. Businesses with big workforces of lower earners - in retail and hospitality - have told the Chancellor that her decision to raise employer national insurance risks lower wages, fewer jobs, and higher prices.

It is one of the ironies of a Budget for Growth, that in the short term it looks like having the opposite impact. An early indication of where the UK economy is heading will be provided by GDP data this week which is expected to show a marked slowdown from 0.5% growth last quarter (and 0.7% in the first three months of the year) to just 0.2% in the third quarter.

Chipped China

Meanwhile in the world’s second biggest economy, growth and inflation would be a nice problem to have. Shares in Hong Kong dipped by 1.5% as trading opened this week and investors poured cold water on a $1.4trn stimulus package from the Chinese authorities. A faltering property market and subdued consumer confidence are hard nuts to crack in the world’s leading emerging economy. And that is feeding through into lower commodity prices. A barrel of Brent oil changes hands for just $73.50 while iron ore and copper prices are sliding too.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of  Fidelity’s advisers or an authorised financial adviser of your choice.