After talking and thinking about the 2024 election for the past year (if not longer), it came to a swift and decisive conclusion this week (well, almost..as this is being written, the House of Representatives vote remains undecided but is trending Republican as well).

In an election that split where the popular was relatively split (52% to 48%), approximately half of the country is thrilled with the result and half of the country is disheartened. There are a lot of emotions and feelings for US citizens to work thru as they decide what this means for them and their futures. Equity markets appear to not need that time to process the result – they knew instantly what they thought of the election result and rallied sharply on Wednesday (and have carried that strength into the end of the week).

What led to the jarring market spike following the election? As I always say, no one knows for certain what drives market movements (and if they tell you otherwise, be very skeptical!). However, I’m always happy to offer my perspectives with you so here are five reasons I believe equity markets were seemingly pleased with the election results

1.) Uncertainty removed, cash deployed – As we’ve written about for months, heading into the election there was an incredible amount of cash on the sideline. Markets (and investors) like certainty and the perceived lack thereof tends to lead to “wait and see” mentalities. Further, as the election approached and the anticipated uncertainty rose (regarding who would win and how long the vote counting would take), there was evidence of even more de-risking observed in the market (ie: a shift out of equities/risk assets and into cash & gold). With the uncertainty now removed and a winner declared, it’s likely a lot of the market action this week was a re-risking as cash was deployed back into equities/risk assets

2.) Lower forecasted taxes – We’ve discussed how the current tax structure (put in place under Trump’s first administration) were set to expire at the end of 2025. Now that a republican sweep looks very likely, it is probable that tax rates will stay as they are or trend even lower. As equity valuations are driven by the present value of future cash flows, lower tax rates result in higher present values (ie: higher prices)

3.) Reduced regulation – Trump has campaigned on a desire to remove various regulatory forces. Sectors poised to benefit the most from increased deal flow, increased protectionism, and less regulation rallied sharply, including investment banks, steel manufactures, auto makers, and heavy equipment manufacturers. Republican administrations (in general) are viewed as pro-business and pro-business activity

4.) Renewed inflation concerns – Perhaps the one headwind from the election result was interest rates. They rates rose on the news, likely due to fears that potential tariffs and lower taxes may reignite inflationary pressures. However, sectors and individual companies that will benefit from inflationary trends responded positively to the results

5.) Short covering – It is also probable that some investors were positioned short going into the election (perhaps expecting a sell off if there was a close or contested result) Given the swift and republican result, those shorts would have needed to be covered – at any price – on Wednesday.

So which factor led to the rally? Again, no one knows for certain, but my assumption is it’s some combination of all of above.

The election wasn’t the only event impacting markets this week. Lost in the shuffle of election week was the Federal Reserve meeting and rate announcement on Thursday. The Fed followed thru on a much anticipated 25 basis point rate cut, their second one of 2024. While inflation had been coming down, as noted above, a Trump presidency may result in renewed inflationary pressures (as could the ongoing strength in the US economy). Fed Chair Jerome Powell was careful to state the Fed would remain highly data dependent and made no promises regarding the timing or pace of future cuts. He also made it clear that the Fed does it’s best to stay out of politics, noting “in the near term, the election will have no effects on our policy decisions.”

As mentioned above, in a virtually split election, statistically half of you are excited and half of you are dismayed as this week comes to an end. I’d encourage everyone to honor and feel whatever emotions you are sitting with today. All are valid. All are important. All matter. I’d also encourage you to keep in mind this message (courtesy of Professor Scott Galloway) – “nothing is ever as good or as bad as it seems.” We will all move forward from this – after all, it’s the only direction we’re able to go.

Onward we go,