The election of Donald Trump initially sent shockwaves throughout the world, but the reaction by the stock market has come as quite a surprise for investment managers. Initially, S&P 500 futures were down 5%, but as the day progressed the reversal was dramatic and the market rallied to close up over 1%.
How does this victory affect the U.S. economy, global markets, and the investment landscape?
Protectionist policies, tariffs, and end of trade agreements go against economics 101. The free trade of goods should lead to increased output and enhance global growth. Increased tariffs, on the other hand, would reduce trade and could dramatically hurt U.S. corporations, which are heavily dependent on global sales.
However, let’s be clear.
We do not yet know what policies President-elect Trump will have and the extent of the cooperation he will receive.
That’s the main point that I want to drive home, future policy and subsequent results remain an unknown and major wild card.
Typically, the market does not like the unknown, that’s why most managers assumed the market would fall the day after. The fact that it rose should tell you something. Although the debt burden would increase, the fiscal policies that President elect Trump have, such as reducing corporate taxes and drastically increasing infrastructure spending, would be net accretive to growth near-term.
Let’s take a look at some of the major asset classes and what their initial performance could be telling us:
Bonds: Negative. Increased fiscal stimulus has the potential to increase inflation. This erodes the value of the income that bonds produce. Furthermore, investors demand a higher interest rate to hold bonds, which reduces the current value of existing bonds. Bottom line is that the market tells us that interest rates will rise.
Stocks: Positive, but mixed. Banks make money on lending and make more of it when interest rates are higher and therefore rallied substantially. Assets tied to infrastructure like industrials will benefit from increased fiscal stimulus and rallied. Big pharma and biotech also rallied substantially as Hillary Clinton had promised to attack drug pricing and those stocks have been beat down prior to the election.
On the other side of the equation, emerging markets sold off as export driven economies and those dependent on current trade agreements would be hurt from increased protectionism.
Real Estate: Negative. Stimulus is good for construction, and real estate is a hedge against inflation, but higher interest rates are bad for real estate and REITs have sold off. Higher interest rates mean higher costs of borrowing and higher cap rates, both hurt pricing power.
Commodities: Initially mixed, but should be positive.
Infrastructure requires raw materials which should benefit commodities. Furthermore, President-elect Trump has emphasized fossil fuels over renewable energy, which should also benefit the asset class.
Most of this initial performance clearly indicates themes that are reflective of the market’s beliefs on President-elect Trump’s platform. But once again, clear policies have not been officially created.
Furthermore, despite controlling both Senate and Congress, many fiscally conservative party members might fight many of the policies.
Here’s bottom line. President-elect Trump is inheriting an economy that is growing, with a consumer base that is strong and has an increased capability to spend. Real growth is probably in the 1.5%-2.0%, but it’s still growth. However, we face an increasing global debt burden and weak productivity, which should mute longer-term global growth and return expectations.
No matter how the election turned out, we are facing a period of increased uncertainty and volatility.
Our job is to prepare for all market environments, and build a structured plan that creates efficient portfolios and removes unnecessary volatility.
We believe that by following a process that combines global asset allocation and non-traditional asset classes, our portfolios will continue to mitigate the risk of downside volatility and achieve your financial goals.
If you would like an assessment as to where you are positioned financially, call us at 585-442-3230 or send us an email. We’ll be happy to help you assess your financial situation.