Chris Wallis, CEO and CIO of Vaughan Nelson, discusses potential market reactions to Trump policy initiatives, year-end outlook, and the escalating geopolitical tensions stemming from Ukraine launching long range weapons and China cutting underwater wires to Europe.

Podcast released on 18 November, 2024

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Lightly edited transcript

Dan Hughes: Welcome to the Vaughan Nelson podcast. With me today is CEO and CIO, Chris Wallis. Welcome, Chris.

Chris Wallis: It’s great to be here.

Dan: All right, Chris, since we last recorded, we finally have had some election decisions here in the US and already post-election, we’ve seen President-elect Donald Trump has made a number of key cabinet selections. First question for you today, do you think that the markets will begin to discount some of his policy initiatives?

Chris: Yeah. Look, I think in areas where there’s some low-hanging fruit and things that can be done with executive order, we’ll start to see and have seen areas where that’s beginning to impact the market, mainly in healthcare at this point. But I would just recommend investors be patient. All we have are the selections now. Even if Thune is encouraging Trump and letting him know that he’ll get his cabinet picks, I’m fairly skeptical that it’ll be that smooth and easy. And then even once in place, you still have to deal with the morass of the agencies, and there’s going to be pushback.

So all I’m taking away from the election is that the private sector of the US spoke about what they wanted. They wanted less of federal bureaucracy, and they wanted less of business as usual, and Trump’s trying to bring in a team to address those desires. But it’s really difficult to make substantial changes or significant changes within the federal government and that entity, that public sector entity, is going to fight back. And they have time on their side, and they have scale on their side, so I don’t think it’s going to be easy by any stretch of the imagination.

And my guess is, as many commentators have said, they’re going to try to hit the ground running on tax policy, and I don’t know that we get cuts. Maybe we get to keep some of the tax cuts that were put in place. And as prior administration can remain there, I don’t think that’ll have a material impact on the market, simply because the market hasn’t discounted any higher tax rates, so I think that’d be a non-event. And it’d be good ultimately, but I don’t think it would be a cause for a rally in the market.

Dan: And thinking about, talking about rally, we saw an initial rally leading into and then post the election. What’s your outlook now at this point for the market between now and year-end?

Chris: Look, we had an initial relief post the election. It may be soft for the next few days, but ultimately, we’re getting into this seasonally strong period with a combination of option flows and reinvestment at year-end. And we’ve got to deal with our usual tax loss selling, and so we’re kind of in the middle of that.

But I’m still fairly constructive moving into year-end, unless we get some crazy geopolitical shock or something of that nature. But we should have the normal seasonal effects. And then once we get probably midway through January and those seasonal tailwinds begin to fade, then we’ll have to deal with probably a little bit more uncertainty, whether it’s coming out of Washington or coming out of some of the conflicts.

Dan: Yeah, and speaking of conflicts, so over the last few days we’ve seen an escalation. We saw Ukraine launching some long-range missiles, and that was supported by the US, into Russia. At the same time, we’ve seen China cutting underwater cables in Europe. Do you think that this increased geopolitical tensions that they’re going to negatively impact the market?

Chris: Yeah. Look, I think it’s interesting to look at the timing of this increase in the escalation of the war in Europe and why really all the parties seem to be escalating the confrontation at the same time. The easy answer is just to say, “Oh, they’re doing it because we’re kind of in-between administrations, and Biden’s trying to lock Trump into a war that he can’t get out of. And so he’s going to escalate it while he’s leaving office.” I don’t know that that’s really the case.

So it’s clear that all the parties are escalating their activity and their conflict. The question is why, and maybe it’s because we’re closer to a negotiation. So Russia’s losing probably 30,000 troops a month that have to be  replaced. They’re now getting support from North Korea. The toll on Ukraine is even more significant, and Russia is gaining ground again. I can’t remember what it was. They’re gaining 120 square miles a week at a very heavy cost. And so the cost of this conflict is beginning to take hold. As we’ve talked about, inflation’s getting ready to move back higher. If we have a cool winter and natural gas is already starting to demonstrate this, it’s going to be a problem for Europe.

And so maybe we’re getting closer to the point where people want to negotiate a truce. They feel like when Trump comes in, that will be an opportunity to do that. And if you were getting ready to go to the negotiating table to cease military activity, I think you’d want to ramp it up. I think all parties would want to ramp it up to look like they’re really tough, and they really want to take it to the next level. And that would, in your own mind, put you in a better position and have a little bit more leverage for negotiations.

I’m hopeful that’s why we’re doing it because it’s clear, Putin’s been very clear that if they start using the long-range missiles that require direct support from US satellites and military personnel to launch, that he would consider that a direct confrontation with NATO. We’re now at that stage. I’m hoping it’s because we’re getting ready to go to the negotiating table when Trump gets into office. And so I’m going to overweight that because I think that’s more probable.

The second scenario is no. They really do want to ramp it up and they want to continue the escalation. They want to continue to distract the US and drain the military resources because China has its eyes on Taiwan in the shorter to medium term. And I’m open to that being the scenario. I just think maybe more logically it would be to look for a truce in the first part of next year.

Dan: All right, Chris. Well, that’s good ones. We’ll put a stop on there for today. So thank you very much, and we’ll have you back again soon.

Chris: Sounds good.

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