The Chapter After the US Election

The disconnect between betting markets, and actual asset moves, versus the polling messaging magnified the level of shock at the strength of the victory, according to Jeff O’Connor Head of Equity Market Structure, Americas, Liquidnet. 

“Really, the equities market has been responding with near certitude to the “Trump Trade” for several months,” he told Traders Magazine.

“There was some waffling late, and may have been driven by profit taking, but what the election did was qualify the accuracy of what the markets were telling us which hearkens back to the old adage, “the price is the news”,”  he said.

“But certainly, going forward, the methods used to ascertain U.S. polling will be very much in question,” he said.

Jeff O’Connor

And early on, the Trump Trade winners have erupted, O’Connor said. 

“While the conviction, outsized volume supporting a high standard deviation move, will have to temper, it is those types of trading days that can signal what the path of least resistance is going to be in the equities market,” he said.

According to O’Connor, it was remarkable to see many of the major indexes hitting all time highs supported by volumes some 60% beyond the averages of the year. 

But it is that type of conviction that triggers the quant/systematic crowd to get involved, he said, adding that it can be described as a technical feedback loop, but almost the guaranteed business of momentum funds grabbing onto the move and then pushing to fresh highs. 

“Couple that with some of the best traditional asset manager flows of the past four years, as reported by sell side trading desks, and the post-election day market action was extremely powerful,” he commented. 

The contrast between the two candidates ideologies has made this election more clear from a market perspective, O’Connor said.

Whether it be corporate tax plans, tariff expectations, or sector specific winners/losers, the candidate dichotomy on visions for the economy, consumers, and suppliers, made the Trump Trade fairly easy to track, he added.

On the first day of trading, the clear cut winners were small caps, banks, construction materials, energy equipment, machinery, etc, he said, while the underperformers included solar, copper, Chinese technology, hospitals, defensives, etc. 

But aside from sector/sub-sector performance, the more macro level trades maybe stand out the most – i.e. the dollar and rates, O’Connor said. 

“What the moves are telling us is that the expectation is that Trump’s second term will follow the first, and that is tax cuts, deregulation, tariffs that will simultaneously spark economic growth, corporate profits, but with it inflation,” he said. 

“And the possibility, seeming more likely, of total executive and legislative GOP control, is exacerbating the strength of moves,” he added.

According to O’Connor, clearly the potential for total GOP control has the institutions getting into trades quicker than they may have anticipated as they position for the future. 

“Continuous institutional volumes in ’24 have been some of the best of the past 7-8 years, however, with equity performance so strong, and the presidential overhang, there was signals of institutional trepidation going into the election,” he said.

Valuations are obviously extended, and this year already marks a major outlier in terms of market performance versus historical averages on election years (+24% vs ~+7%), according to O’Connor. 

One area that has gotten a significant boost is the small cap space where the prospects of better business backdrop (along with deregulation) are letting stocks move in the face of a total rate reprice, he said. 

This arena is the most sensitive to higher interest rates, and should rates go higher from here, in general, not just for small caps, equity performance will see a cap, he said.

“In the end, the noise of the election will die down and volumes will revert quickly,” O’Connor said. 

“There are signals that, globally, fund managers are over-exposed to U.S. markets and available cash has moved towards historical nadir levels.  Performance is being driven by the macro backdrop,” he said.

“The market obviously likes the prospects from a fiscal perspective, and the FOMC’s job gets tougher as campaign promises point to a possible res-snap on inflation, but equity performance is going to continue to be driven by macro data points – the ability to meet steeper earnings growth expectations into 2025 and the ability to navigate the economy into a soft/no landing,” he added.