The Transcript Editor's Commentary

Themes from our newsletter

Our Editor’s Commentary is now available only to premium subscribers. Please subscribe to support our work!

-Scott

---

Election Uncertainty Ends

The U.S. Presidential election ended last week with an electoral landslide for Donald Trump and the Republicans. This ends the uncertainty over which party will control the US government for the next four years and so begins uncertainty about how the Trump administration will actually govern.

Markets have generally reacted positively to the results since companies and investors are expecting a pro-business administration. We published six quotes last week from a variety of industries that in some way mentioned improving confidence. This is not all due to the election, of course, but the election does provide a convenient bookend for people to begin to look forward with slightly more optimism for a changed economic picture.

Confidence has room to rise, in part, because partisanship itself impacted perceptions of the economy. Republican voters consistently voiced a more negative view of the economy than Democrats. Redfin’s CEO Glenn Kelman hinted at this dynamic when he said, “More and more, we live in our own reality. And that reality is increasingly political.”

With this in mind, Stanley Druckenmiller pointed out that Trump’s victory could revive “animal spirits” in the markets. Others have called this a return of the “Trump trade”. Goldman Sachs’ Equity Execution Head noted “We've seen clients engage on trades that worked following the 2016 election, which were long banks, long technology, long energy stocks...post the 2016 election, every bank out there was saying that 2017 was going to be a year of volatility…But 2017 actually was one of the lowest realized vol calendar years in the last 60 years.”

On the flip side, valuations are now reaching beyond extreme levels. The S&P 500 has crossed the 6000 mark and is trading at almost 30x peak earnings, approaching levels only seen in the dot com era. Analysts expect ~25% earnings growth between now and the end of 2025, which also seems somewhat improbable. Expectations will be very difficult to meet.

Governing Uncertainty Begins

Election uncertainty is over but uncertainty over how the government will take shape has now begun. Legislative priorities often diverge from campaign rhetoric once the focus turns to governing. To that end, we’ll have to wait and see how Trump really acts in a second term. We won’t get a clear sense of priorities until at least the first 30-60 days after inauguration.

As Jerome Powell put it, “There’s nothing to model right now. It’s such an early stage we don’t know what the policies are.” 

One sector that certainly seems poised to benefit is