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What Trump’s win means for markets and portfolios
- The 2020 market environment is expected to replicate the 2016 election playbook through continued tax cuts, an improved M&A climate, and reduced banking regulations, with the U.S. economy viewed as stable in a late-cycle phase without recession expectations.
- Goldman Sachs Research anticipates a 25 basis point Fed cut immediately, though the policy trajectory is shifting toward fewer cuts overall as markets have already adjusted expectations; consequently, rates and FX volatility may remain sticky, particularly regarding U.S. policy exposure, despite potential normalization over the next few months.
- Risk factors include a grinding rally potentially triggering a "spot-up, vol-up dynamic" as clients chase call options, along with the threat of U.S. 10-year yields rising more than two standard deviations from their trough within a three-month horizon, which could cause equity indigestion, while real yield spikes relative to trend growth may also weigh on equities.
- Primary investment allocations recommend being overweight equities, underweight credit to avoid negative convexity, and maintaining neutral duration, with specific geographic positioning of overweight U.S. and Asian equities while underweighting Europe due to tariff and economic risks and remaining neutral on Japan.
- The strategy seeks to capitalize on domestic laggards, specifically under-owned sectors outside the MAG7, and intends to leverage decreasing hedging costs over the remainder of this year and potentially next year.
- A key challenge involves protecting equity positions over the next six to 12 months against setbacks from reflation frustration, geopolitical events, and policy uncertainty, while potential short-term trading strategies may involve leaning against rates volatility to capture carry.