A Blue Wave, a Red-Faced President and an AI Hangover
This post was originally published on jpfs.com
Well, that wasn’t quite the week Donald Trump or Wall Street had in mind.
American voters handed the Republicans a political kicking, the Democrats seized both houses of Congress, and suddenly some of Wall Street’s favourite investments don’t look quite so comfortable. Big Tech took a bit of a beating, Treasury yields eased, the dollar weakened, and investors began wondering whether the Trump trade had finally run out of road.
And this could be just the beginning.
A hostile Congress threatens to frustrate further tax cuts and spending plans, while putting banking, cryptocurrencies, and the AI industry under closer scrutiny. Less fiscal stimulus might help bonds but hurt growth expectations. More regulation could squeeze valuations. Throw in another potential debt-ceiling confrontation and fund managers have plenty to lose sleep over.
Of course, political gridlock isn’t necessarily bad for markets. Sometimes the best thing politicians can do for investors is absolutely nothing. But with American debt enormous and corporate valuations stretched, Washington’s latest political earthquake has arrived at an awkward moment.
The scale of the Democratic victory matters. Voters in traditionally Republican territory appear to have lost patience with the cost of living, the Iran war and the political circus. Trump still has his veto and considerable executive authority, particularly over trade and foreign policy. Democrats cannot simply impose their entire programme. What they can do is block legislation, investigate the administration and turn every budget negotiation into an endurance test.
Now, the bond market might initially welcome a brake on fresh borrowing. Ten-year Treasury yields slipped to roughly 4.9% as the results emerged. But please don’t mistake gridlock for fiscal discipline. The debt mountain remains, interest payments keep arriving, and neither party has shown much enthusiasm for telling voters that the free lunch has been cancelled.
For equities, the consequences are less straightforward. Banks may struggle to secure further deregulation. Defence contractors face uncertainty over appropriations. Technology companies could encounter tougher questions on competition, data centres, electricity demand and AI investment. Yet a divided Congress might also prevent sweeping tax changes. Markets will have to separate political threats from policies that can actually become law.
That distinction is particularly important for Big Tech, whose problems began before election night. Alphabet’s sharp post-results fall exposed a growing concern over the sheer cost of artificial intelligence. Amazon and Intel have felt the pressure too. After years of rewarding companies merely for mentioning AI, investors are finally demanding evidence of a return.
About time. There is a difference between a technological revolution and a profitable investment. The firms supplying the shovels may prosper; those digging enormous holes in their balance sheets might not. With the Nasdaq under pressure, signs of money rotating towards smaller companies, industrials and more sensibly priced businesses deserve attention. A broader market would be healthier than another rally resting on a few expensive shoulders. The Nasdaq-100 entering correction territory suggests that this debate has already moved beyond theory: investors are marking down promises and asking much harder questions.
Europe, unusually, has enjoyed some comparative resilience. The STOXX 600 advanced as investors considered the implications of divided US government, while the euro benefited from a softer dollar. That said, I wouldn’t mistake that for a sudden cure for Europe’s economic ailments. Currency markets will ultimately follow growth, inflation and interest-rate expectations, not merely election-night excitement.
Gold has rediscovered its appeal, rebounding above the $4,000 area as the dollar retreated and investors sought somewhere less political to park money. Oil has moved the other way. Brent was near $103 and WTI around $93 on Wednesday, reflecting hopes that Washington may seek an exit from the Iran conflict. But a rumour of peace isn’t peace, and disrupted Middle Eastern supplies remain a very real risk. One ugly headline could change the picture overnight.
Bitcoin recovered towards $78,000 after briefly dipping below $76,000. Its regulatory outlook has become less comfortable under a Democratic Congress, but price action remains driven by liquidity, sentiment and confidence. That’s enough Bitcoin for one week.
So where does that leave us? Watching Washington, certainly, but watching cash flows, bond yields and the dollar even more closely. Political gridlock could reduce uncertainty or simply replace it with rolling crises. Either way, paying fashionable prices for uncertain profits strikes me as an expensive hobby.
My approach remains straightforward: diversify, favour quality and preserve the flexibility to act when markets offer genuine value.
Sure, we are going to see a fair amount of knee-jerk reactions immediately after the election results, but after fifty years in this business, I’ve learnt that politicians change, slogans change, and the promises grow grander.
But somehow, the bill always arrives.
Please note the political opinions expressed above are those of the author himself, and do not necessarily reflect the opinions of JP Fund Services AS.
The post A Blue Wave, a Red-Faced President and an AI Hangover first appeared on JP Fund Services.
Follow us, and keep yourself up to date with news and views about what's going on in the world's financial markets.
Latest News
THE AI PARTY STUMBLES, OIL BOILS, AND CENTRAL BANKS KEEP EVERYONE GUESSING
Election Fever, Dollar Strength and That AI IPO
Industrials – Is underperformance temporary?
