Reflecting on a post-election market surge

Just two weeks ago the US presidential election result was revealed bringing a close to the most anticipated political event of the year. Investors are continuing to price in their expectations from what we can expect from a Trump administration for the next four years; of which so far, we have seen a surge in both mainstream capital markets with the S&P 500 reaching new all-time highs and risky assets such as crypto currency breaking above $90,000 for the first time. But should we be applying some caution to our approach?

Irrational exuberance?

In 1996, the former Federal Reserve Alan Greenspan famously warned investors about the dangers of ‘irrational exuberance’. His caution came too early with his comments focused on the buoyancy of the market and investors buying into assets at all time high prices; it would take a further four years for the dot.com bubble to burst.

Fast forward to today and one could argue that world, once again is enjoying a surge across markets. Mainly driven by Trump’s pledges to cut taxes, deregulate certain sectors and create a more business friendly environment. Markets often swing like a pendulum and this rapid ascent rises the possibility that caution is being thrown to the wind. In other words, fear seems to be leaving the market and confidence is building boosted by the feeling of clarity regardless of our views on positioning in the US post-election and in the UK post budget.

Octobers Inflation Figures in the UK?

October’s inflation figures released today show inflation sitting at 2.3% up from 1.7% in September. The blame has been placed upon rising energy prices, meaning that other prices will also subsequently increase. Furthermore, many businesses have been warning about the impact of Labour’s first budget which could lead to further price rises and even job cuts. With inflation seemingly on the rise, it placed caution to how quickly interest rates will be cut by the Bank of England moving forwards (even though rates were cut last week bring the base rate to 4.75%).

 Diversification more important than ever

With asset classes continuing to rise, it is more important than ever to remain diversified in our strategies and focused on your own short-, medium- and longer-term goals.

The focus has been mainly on the US market which as risen 25% this year, largely driven by 7 stocks on the S&P 500; termed the ‘Magnificent Seven’ these holdings are Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Meta (Facebook) and Nvidia. All of these are technology large cap holdings, which are extremely concentrated segment of the market which driving most of the performance.

No-one is saying a sea change will happen tomorrow or next week, however when the market does pivot there will unlikely be a bell ringing to warn us. We can’t predict the timing and therefore all we have left is to be prepared in our approach and strategies. So, in practical terms, the market is reducing its allocations to large-cap growth stocks in favor for a broader approach. This could come in the form of ‘value’ stocks, cheaper large cap companies and increasing exposure to the small and mid-cap markets which have been undervalued for some time.

But as we look further afield investors are turning their focus to Europe, as well as emerging markets.  The sentiment has dropped in the UK as the fall out of the autumn budget with higher taxes for businesses starts to weigh in and this has been compounded today by the inflation figures coming through. To give context the FTSE 100 has returned circa 11% this year; a far cry from the returns of the S&P 500.

What has been happening in the Gold market?

A key highlight in the alternative asset space is the u-turn by Gold. In the lead up to the election we saw investors flocking to gold as a safe-haven asset due to concerns about his getting tough approach on Ukraine and the Middle East could lead to deteriorations in these areas. Gold was the asset class winner of October. With a reminder for how markets can shift quickly, gold prices over the first two weeks of November have seen volatility as we have seen a shift away from assets not paying income and are hearing more opinions that interest rates are likely to remain higher for longer, coupled with a rally on the dollar price has created unattractive conditions for the gold market. Particularly the dollar element as this makes gold more expensive to buyers using other currencies.

The road ahead is unlikely to be the road travelled…

Up until about four years ago, we had enjoyed nearly two decades of low interest rates and low inflation figures. Over the past few years this changed dramatically, with 13 consecutive interest rate rises from the end of 2021. A response to tackle soaring inflation reaching double digit at one stage. Since then, we have seen inflation falling, interest beginning to be cut and have had a change of government in the UK- giving their first budget just a few weeks ago. All in all a period of immense change; and with change comes the need to ensure you are reviewing your strategy and ensuring it is appropriate for the fiscal environment you are in currently.

With the budget announcing the largest tax raid in the UK that we have seen in decades, now more than ever I believe there is a need to focus on the structures you are using to invest your money. Focusing on ensuring this is the most efficient way to invest, whilst also being appreciative that the lens you are looking through will lead the direction of your planning. If your focus is capital gains tax or income tax, it will likely be a very different scenario to inheritance tax planning and so forth. It may well be a combination of them all; so, for now my advice is to take stock and break out your goals into short, medium and longer term. Thinking to yourself is this the most efficient route for me. If you are usure please don’t hesitate to reach out and have a chat!

Frankie