How the markets react to Trump's election victory

In the early hours of Wednesday morning, the news broke: Former President Donald Trump secured enough votes to win the presidency.

Whether this alleviates or increases your anxiety, it means that a lot of the uncertainty has been removed. There will be no protracted legal disputes over the results for the rest of the year. And the markets react to this certainty.

This day after the election, “Marketplace Morning Report” host David Brancaccio spoke with two economists to see how markets are reacting to the election news. Joining us first is Ben Kumar, Head of Equity Strategy at Seven Investment Management. You can listen to the interview by clicking on the audio player below.

David Brancaccio: The abbreviation for this is called “Trump Trade”. Walk me through the logic of some of these, starting with stocks. What general categories are they buying here and what is their strategy?

Ben Kumar: US stocks are basically the strategy. I mean, the Dow, the Nasdaq and the S&P 500. Another interesting index is the Russell 2000, which is smaller US companies and last time I checked it was up 5 to 6%. You know, there's actually a sense that this means that US domestic strength is back in sight, which is consistent with at least some of what Donald Trump has said. And it seems that markets are willing to believe that, at least today.

Brancaccio: Now, of course, some of these U.S.-based companies are multinational corporations, and some will argue that the tariffs the next president promises will further drag down the economy, contribute to inflation, and clog the arteries of world trade . That would probably hurt the profits of some of these companies being bought this morning.

Kumar: Yes, I think that is absolutely correct. There is a version of Tesla shares trading in Frankfurt, Germany, up 15 or 16%. But you know, if tariffs go up and Chinese retaliation occurs, it's not guaranteed that Tesla will continue to do better. So you are absolutely right. But I think what we're seeing this morning, before any details come to light, is just a general wave of optimism and actually, I think, a wave of relief that this isn't going to drag on for another month or two. We're done now and we can look to the future and see what's next for a U.S. economy that, you know, if you listen to Donald Trump, feels like it's ready to grow again.

Brancaccio: Yes, there's this VIX index we have here out of Chicago, called the stock market volatility fear index – it's down a lot this morning, which supports your point there. Now the bond market has fallen sharply, sending the 10-year interest rate sharply higher this morning. What's the logic there?

Kumar: Well, I mean, some of what has been said, if you look at the actual manifestos, is that there will be more borrowing under a Trump presidency than under a Kamala Harris presidency, on the order of almost 4 Trillion dollars more. But if you can borrow and do that, you can get growth going. Actually, that's not so bad. However, this growth will occur 234 years in the future. So as of today, the bond markets are a little more sensible. They're just going to borrow more, so we probably want to charge them.

Next, we'll ask economist Julia Coronado, founder of MacroPolicy Perspectives and professor at the University of Texas-Austin, for her opinion. Listen to her interview by clicking the audio player below.

David Brancaccio: They call it “the Trump trade,” but make sure we understand that.

Julia Coronado: So, yes, Trump's argument is that there will be tax cuts, there will be tariffs, and that will expand the deficit. And that means a higher dollar, higher inflation and therefore higher interest rates. But (it's) good for stocks.

Brancaccio: Okay, so bigger deficit – I thought this talk of cutting $2 trillion from the federal budget with billionaire Elon Musk and hedge funder John Paulson might help with that?

Coronado: Yes, that is not the Responsible Budget Committee's estimate. They estimated that Trump's proposals could increase the deficit by $7.5 trillion to $8 trillion over the next decade. And it's always easier to add sugar instead of spice, so cutting taxes is a top priority, and the market is betting that's exactly what will happen, especially given the strength of earnings.

Brancaccio: Indeed. Now look at the rush into stocks. I mean, I would have expected people to be buying fossil fuel companies this morning, but it's much broader.

Coronado: Yes, Trump comes with a very good economy and an outperformance of the USA. So the assumption is that if tax cuts are added, that will be good for growth on a broad basis. Of course, tariffs could hurt growth. So that's the immediate reaction – how this all plays out over time remains to be seen.

Brancaccio: And to go back to your previous point, higher interest rates this morning make the US dollar more attractive. You see all of this in the foreign exchange markets today.

Coronado: Absolutely. These moves are huge, so big jumps in longer-term interest rates, just when we had hoped they would soon fall, creating a much stronger dollar against most currencies.

Brancaccio: So the Federal Reserve, which meets today and makes a ruling on interest rates tomorrow, will trend in the opposite direction.

Coronado: That's right. The Fed has tried to cut interest rates to give the economy a break and boost housing and other interest rate-sensitive sectors, but it has no control over longer-term interest rates. So they'll probably go ahead with a 25 basis point rate cut, but that won't translate into lower mortgage rates or loan rates because longer-term interest rates will be distracted by expectations of higher inflation and higher deficits.