With Republicans likely taking control of the Senate as well, the
odds of a Republican-controlled federal government in 2025 are rapidly being priced into the
markets. This prospect is expected to usher in an era of more inflationary policies due to
factors like tax cuts, increased fiscal spending, pressure on the Federal Reserve, and new
trade restrictions.

Initial Market Reactions

•
Equities surged, particularly in small-cap and cyclical sectors are expected to
benefit from the anticipated domestic economic boost
•
Government bond yields sold off aggressively, especially on the long end, as
higher inflation and borrowing needs could create a supply/demand imbalance
•
Bitcoin reached new highs
on expectations of a more favourable regulatory
environment to cryptocurrencies under the Trump administration
•
Renewable energy stocks fell while Fintech surged on the expected policy shifts
•
Homebuilder stocks sold off as hopes for mortgage relief faded

•
The U.S. dollar strengthened on the back of divergence in global monetary
policy and economic growth rates
•
The Mexican Peso fell to 2-year lows on fears of new tariffs and trade
restrictions


Equity Team

Overall, the 2024 election results point to a continuation of the populist, America-first
policies of the previous Trump administration, with potentially significant implications
for the economy, markets, and U.S. global standing.

While a "Red Sweep" of Republican control across the federal government could
initially benefit small-caps and certain sectors expected to benefit from lower
corporate tax rates like financials and industrials, there are still important differences
from the 2016 environment that temper the outlook.

Unlike 2016, when the economy was still recovering from a deep contraction, today's
later-cycle backdrop is characterized by high inflation rather than deflation. Bond
markets may not embrace further deficit expansion under a Trump presidency in the
same way they did previously. This could pose risks to cyclical equities that have
priced in additional rate cuts.

Additionally, the ability of multinational corporations to repatriate overseas cash—a
major boon in 2016—is less of a factor this time around. The ramifications of potential
corporate tax cuts to 15% may also be more muted for domestic-focused American
companies compared to their multinational counterparts.

Overall, while a unified Republican government could drive certain near-term
market rotations, the longer-term implications are more complex given the
different economic backdrop compared to 2016. We would caution investors about
automatically extrapolating the prior playbook into the current environment.



Fixed Income Team

This clear-cut outcome removed fears of contested or delayed results, driving rates
higher and fueling equity market gains as results emerged overnight.
.
Overnight, U.S. rates sold off sharply, with the yield curve bear-steepening amid
inflationary concerns related to tariffs and increased deficits under Trump's economic
plan.

Risk assets, including credit and equities, rallied on expectations of deregulation and
accelerated growth. U.S. equities surged by 3–5% on the result day, while investment-
grade credit spreads tightened by 5–7 basis points, pushing spreads back toward
historical tights. Canadian interest rates, meanwhile, outperformed U.S. interest rates
on expectations of diverging policy paths between the Bank of Canada and the Fed,
given concerns that U.S. protectionist trade policies might negatively impact Canadian
economic growth.


Arbitrage Team

The Arbitrage Funds are expected to benefit significantly from the new Trump
administration. Antitrust regulation under Biden, headed by Lina Khan at the Federal
Trade Commission (FTC) and Jonathan Kanter at the Department of Justice (DOJ), has
been biggest challenge in decades to the merger arbitrage strategy. These two
regulators have been challenging more mergers and zealously pursuing novel
antitrust arguments. While they have been largely unsuccessful in the courtroom, they
have had a cooling effect on Mergers and Acquisitions (M&A) activity and have
dragged out many announced deals, reducing arbitrage rates of return and increasing
volatility.


We expect Khan and Kantor to either resign or be replaced in relatively short order
in the new administration and a return to normalcy in US
antitrust enforcement and
an uptick in M&A activity. We are already seeing some evidence of this with many
merger arbitrage spreads tightening immediately post-election.