The market’s verdict on Trump 2.0

Where should we start? Don’t know if you happened to watch the news last night, but Republican Donald J. Trump won the 2024 election, defeating Democrat Kamala Harris in a close, but decisive, election.

Because of the fact that polls had shown an incredibly tight race, Trump’s victory was indeed new and important information for markets and investors.

There’s really no end to the potential implications for investors.

Trump has threatened to impose across-the-board tariffs, and even the Trump-friendly Wall Street Journal has said his second term in office could “radically remake world trade.” And his personal and political record indicates that government deficits, already immense, may get much larger with him in office, which could both supercharge already solid economic growth, or potentially reignite inflation. Maybe both. Nobody knows exactly.

There’s a lot of uncertainty out there, but there are also plenty of big, interesting moves afoot in financial markets. Here are some of the most notable and how we, and others, are making sense of them.

The greenback — as measured by the US dollar index — soared overnight and is currently on track for its biggest single-day gain since September 2016.

Why? Remember, currency prices are always measured against other currencies. The strength of the US dollar actually reflects a sharp weakening of currencies of major trading partners, including longtime allies like the UK and the EU. In theory, the US dollar can serve as a “release valve” to offset the impact of potential tariffs: the cost of a foreign good doesn’t go up as much for a domestic importer if the US dollar rises relative to that foreign currency.

Yields on the benchmark US 10-year Treasury note jumped on the election news, rising about 0.15 percentage points, the most since April.

Why? Tread carefully when trying to explain bond-market moves. Long-term bond yields are traditionally sensitive to changes in the outlook for inflation and economic growth. So, you could read this as indicating an uptick in either of those, or both, under the Trump administration. When we decompose the move in Treasuries into the so-called breakeven inflation component and real rate component, it looks like a mix of both.

This also likely reflects some relief from investors that the election is over, so people are moving from the safety of bonds to riskier stuff like stocks. (Remember, bond prices and bond yields move in opposite directions, so when bond yields rise, it means the price of those bonds is going down.)

As a side note, this is going to feed through to higher mortgage rates, which won’t help housing affordability at all in the short term.

The market posted a pretty solid gain after the vote came in, rising about 2% and putting the S&P 500 on track for its biggest gain since early August. The Russell 2000 index of small-cap stocks exploded, rising more than 5%. The Nasdaq 100 rose about 2%.

Why? Again, it’s worth being careful about attributing the move to any one thing. But clearly some investors could see the potential merits of the Trump-related reduction in regulation — credit-card stocks such as Synchrony Financial and Discoverposted explosive gains, for instance. Also, the Russell 2000’s gains likely reflect expectations for a potential enhancement of Trump’s corporate tax cuts under what looks to be unified Republican control in Washington. Small caps tend to be more domestically focused. That makes them more sensitive to US tax rates as they’re unable to use a global footprint to minimize tax exposure the way corporate giants in the S&P 500 can.