Institute Alert

• According to the call by the Associated Press, Donald Trump won the U.S. presidential election, and Republicans gained control of the U.S Senate, leading capital markets to price in a potential Republican (or “red”) sweep.
• There were a number of notable market reactions on Election Night that correlated with policies that candidate Trump emphasized during the campaign.

• Despite these initial market movements, we are holding to our published guidance.
• One of our core beliefs is that elections create knee-jerk market reactions that are more political conviction than tangible, longer-term investment opportunities.

According to the call by the Associated Press, Donald Trump won the presidential election, and Republicans gained control of the Senate, leading capital markets to price in a potential red sweep. The House had not been called as of the time of this writing, with more than 100 races yet to be called. Ultimately, the size of Trump’s margin should hint at the Senate majority, which could be as high as 54 or 55 seats. While votes were still being tabulated as of this writing, swing-state results overnight favored a stronger Republican showing, and market actions began confirming this early in the evening.¹

There were a number of notable market reactions on Election Night that correlated with policies that candidate Trump emphasized during the campaign. One prominent policy is to increase tariffs on imported goods. Another is to tighten immigration at the southern U.S. border, potentially with some deportations.

Levies on trade should increase domestic business activity and reduce U.S. imports. We believe these effects should help more domestic-oriented U.S. small-cap companies and raise the U.S. dollar's exchange value against other currencies. Likewise, in our view, price hikes on imported goods and much less labor supply growth (due to tight border controls) should boost inflation — the former through higher import prices and the latter through rising wages that pass into higher prices for U.S. consumers. In turn, rising inflation should raise longer-term bond yields. Overnight, we saw a number of market movements consistent with expectations for higher tariffs:

• Foreign currencies depreciated against the U.S. dollar: A number of currencies of countries that depend heavily on trade with the U.S. were trading on election night, and most depreciated against the dollar. These include the Canadian dollar (which on Election Night reached its weakest level since May 2020), the Mexican peso (which hit an all-time low versus the dollar), and every Asian currency, all of which depreciated against the greenback on Election Night.
• Bond yields rose sharply: Amid unusually strong volume for a night session, the 10-year U.S. Treasury yield returned to recent highs, near 4.40%, and volume was more than four times larger than the average for the past 10 days across all tenors.

Markets appeared to be expecting a continuation of Trump’s deregulation policies from 2016 – 2020, as well as the potential for lower taxes, which may be more feasible if Republicans lead in both chambers of Congress. U.S. equity prices also rose, including the S&P 500 Index and the Russell 2000 Index of small-capitalization companies:

• U.S. Large Cap Equities could benefit from a combination of deregulation and potentially additional tax cuts.
• Smaller, domestic-oriented companies should find an advantage from tariffs on imports.

Crude oil also fell sharply overnight: There is a possibility that a Trump administration might ease energy export restrictions on Russia, while tightening limits on Iran. Russia’s oil production is nearly three times that of Iran, so these potential changes to sanctions should result in more global oil production.

Bitcoin price rose sharply: Trump spoke positively about digital assets while he was campaigning. As election results rolled in, the price of bitcoin spiked higher and was holding its gains as the night wore on.

One of our core beliefs about elections and markets is that the latter must endure some temporary repricing around this event every few years, but that these dislocations have tended to be temporary in nature. History reminds us that the S&P 500 Index has tended to rise regardless of the balance of power in Washington. The strongest backdrops have tended to be a Democratic Presidency with a split or Republican Congress, and Republicans controlling the White House along with both chambers of Congress. In this context, we are more focused on longer-term opportunities that can create tangible tactical opportunities around the policy action rather than short-term trades. It is important for investors to distinguish between near-term market reactions and true market rotations that have durability of price movement. They can be two very different things.

One caution: While markets priced in the potential for a Republican sweep of both houses of Congress, it is still possible that additional counting after Election Night may alter expectations for the House. It may take several days before control of the House is determined.

¹ The swing states in this election include Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk, they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Virtual or cryptocurrency is not a physical currency, nor is it legal tender. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience, and willingness to bear the risks of an investment, and a potential total loss of their investment. An investor could lose all or a substantial portion of his/her investment. Cryptocurrency has limited operating history or performance. Fees and expenses associated with a cryptocurrency investment may be substantial. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional fiat currencies.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.