Last night’s election win was another surprise for political pundits as well as for markets. The initial broad market reaction has been muted as participants assess the economic impact of Trump’s policies, the likelihood of their implementation, and those segments of the markets potentially impacted.
The more uncertainty enters the landscape, the more the market typically puts some discount in place to account for it, which could cause certain sectors to trade down overall. However, it’s important to step back and realize that the longer-term performance of the economy will probably continue to be the greatest driver of earnings.
In the very short-term we have seen a steepening of the yield curve and more volatile interest rates, which is likely driven by rising inflation expectations. Components affecting inflation expectations would seem to be the market pricing in the possibilities of more fiscal stimulus through infrastructure spending, trade protectionism and stricter immigration policy affecting the labor market.
On the other hand, if the Congressional Republicans and Trump can align [with bipartisan support] on tax reform which we expect to be a top priority, we could see the possibility of companies repatriating dollars back into the U.S. economy which would offset rising inflation.
Under a Trump administration, we could eventually see a more accommodating environment for business, regulation, M&A activity in addition to tax policy reform. That would be a tailwind for certain sectors, such as healthcare, financials, and utilities, and would play into the fundamental outlook for earnings and cash flows. Adversely, Trump has talked very tough about trade, which could lead to a reversal of the accommodating trade policies of the past and we have to consider how other countries’ responses to changes in our trade policy would impact companies that do a lot of business with foreign partners, customers and markets.
While Republicans held Congressional control overnight, there will still need to be bi-partisan support and it is too early to tell what policies may or may not be implemented or altered under Trump’s administration. We expect to see continued volatility as domestic and foreign markets continue to process future economic implications.
We are once again are reminded of the importance of separating emotional reaction from the investment process. It is our strong belief that a systematic approach to building portfolios that are well diversified and can adapt to economic and market fluctuations is the best way to deliver on client outcomes. Our Investment Committee is diligently monitoring market conditions and your portfolios during these emotional, volatile times.