Nov 7, 2024, 12:00 PM ETOther

What Trump’s win means for markets and portfolios

U.S. stocks, bond yields, and the dollar surged sharply following Donald Trump's presidential victory, with markets pricing in a "red sweep" scenario.
Clients entered the day underweight on risk (positioning rating of ~5/10), prompting a rapid shift toward long positions in banks, technology, and energy sectors.
Equity flows resemble the 2016 playbook, with Goldman Sachs analysts noting the S&P 500 could rally to ~6,100 if it repeats the 2% post-election jump plus a subsequent 3.5% move seen in late 2016.
The VIX experienced one of its largest two-day declines in the last decade, dropping faster than anticipated as election certainty was achieved by 11 a.m. Wednesday.
Renewable energy stocks suffered immediate dislocation, with some names falling 15–20% due to fears of potential changes to the Inflation Reduction Act (IRA).
European equities initially rose on global risk-on sentiment before diverging downward as markets priced in the negative growth impacts of potential tariffs.
Commodities broadly declined, breaking from traditional reflationary patterns where oil and copper typically rise alongside equities and bond yields.

Despite historical uncertainty in Trump administrations, the VIX remains suppressed because investors are under-hedged and actively adding risk rather than hedging against volatility.
Goldman Sachs Research notes that 2017 was one of the lowest realized volatility years in the past 60 years post-2016 election, characterized by index stability despite significant dispersion among sectors.
Rates volatility and FX volatility have declined less sharply than equity volatility, reflecting lingering nervousness regarding bond yield levels and tariff policy details.
Traders are expected to chase call options during a sustained equity rally, which could eventually create a "spot-up, vol-up" dynamic despite current vol-suppressive trends.
Market pricing assumes a 25 basis point Fed cut tomorrow is highly probable, though expectations for next year's cuts have been reduced by approximately 0.5 cuts due to reflationary signals.

Goldman Sachs maintains an "equity overweight, credit underweight, neutral duration" strategy, viewing the current environment as a "stable early-late cycle" backdrop without immediate recession risks.
The firm is currently overweight U.S. equities and Asia, while neutral on Japan and underweight on Europe due to tariff risks and weaker growth prospects.
U.S. 10-year yield increases are currently tolerated by markets as the source is viewed as favorable (growth, deregulation, tax cuts), but yields rising more than two standard deviations over three months could trigger market indigestion.
Real yields are a critical constraint; if they rise too far relative to long-run trend growth expectations, equities could face downside pressure.
Investors are advised to look for domestic laggards (under-owned U.S. sectors outside the "Magnificent 7") and international value as potential drivers for broadening equity returns.
The cost to hedge portfolios is expected to continue decreasing over the next six to 12 months, potentially making protection attractive for risk-on strategies.

A "reflation frustration" phase is anticipated if the speed of the bond yield increase outpaces the market's ability to digest the growth-inflation policy mix.
European equities and credit are positioned to suffer from trade tariffs, leading to a "underweight" stance on Euro equities and European high yield.
Geopolitical uncertainty and policy appointment delays remain key variables that could prevent rates and FX volatility from normalizing fully by year-end.
The market has already "backpedaled" on Fed cut expectations based on strong macro surprises and growth data, a trend that has accelerated post-election.
Investors are advised to protect equity overweights via hedging for the next six to 12 months unless there is a definitive shift toward recessionary fundamentals.