Yesterday, citizens of the United States unexpectedly voted for Donald Trump as our next President, and also left Republican majorities in both the Senate and House of Representatives. Markets around the world initially reacted very negatively last night with S&P 500 futures down as much as 5.7%. Losses have since moderated or even been erased following Trump’s gracious victory speech and Clinton’s concession, avoiding a contested election. Trump has been viewed negatively by the stock market in the past because he is the much more uncertain candidate and some of his policies, if enacted as currently stated, could lead to major market disruptions, especially in global trade. However, there are several market positives that could come from a Trump presidency, and many have commented on the numerous similarities between this event and the UK’s Brexit vote in late June, where the market sold off sharply but quickly recovered. At GGS, we do not view Trump’s win as a reason to alter the long-term orientation of clients’ portfolios.
Potential market positives from a Trump victory:
- Taxes: While Trump’s tax plan and that favored by Republican members of Congress like Paul Ryan have significant differences on areas like entitlement reform that will be difficult to reconcile, both favor lower taxes for both individuals and corporations as well as a foreign tax holiday to bring back money stored overseas. This would be a clear positive for the US stock market should it be enacted, and it is the center-point of Trump’s plan to increase US GDP growth.
- Regulations: It is highly likely that Trump’s presidency will result in fewer new regulations and perhaps the repeal of some of the regulations that Obama has enacted. Most notably, any relaxation or outright repeal of Dodd-Frank would help relieve the significant compliance burden on US financial institutions.
- Infrastructure: Both candidates discussed increasing spending money to rebuild and repair infrastructure in the United States. If Trump can get money to this area many construction firms and basic material providers will benefit, though fiscally conservative Republicans may block him on this front.
- Other Industries: The biggest industry outperformer today may be Pharmaceuticals as Clinton had proposed specific policies targeting rising drug prices. It is unclear what action, if any, Trump will take on this issue and Prop 61 in California also failed, so they are seeing a relief rally this morning. Defense stocks should also benefit from a Trump presidency given his campaign pledges to increase spending.
Potential market negatives from a Trump victory:
- Uncertainty: For investors, more uncertainty equals more perceived risk, and more perceived risk leads to market sell-offs as investors demand a greater amount of return going forward to compensate. Ultimately, the implications of Trump’s victory will depend on the policies he enacts and the changes he makes in Washington, which many expect to be very different from his campaign platform that itself was much less specific on many issues than Clinton’s. Combining this with the influence of global macro events largely out of his control, and it is extremely difficult to know what the next four years will actually look like. Contrasting that scenario with a Clinton “more of the same” presidency, Trump represents significantly more uncertainty. In addition, Clinton’s more extreme plans would have likely been stymied by the Republican-controlled House of Representatives, leading to a status quo environment. With a Republican president and Congress, some of Trump’s more extreme policies may actually be enacted, again leading to more uncertainty.
- Trade policies: The most potentially harmful to the economy of Trump’s policies are his expressed views on foreign trade. Nearly all large corporations in the United States and globally depend on the ease of trade between nations. Trump has called for drastic actions on trade such as rewriting NAFTA and numerous other free trade deals. While he may ultimately be able to fulfill his promise of negotiating better trade deals for the United States, the process of renegotiating these deals creates significant uncertainty for companies doing business cross-borders. Additionally, Trump has threatened to hold China accountable for currency manipulation. Labeling a country a currency manipulator is a real declaration, with real implications, but it technically must be declared by the Treasury Secretary not the President after carefully analyzing currency trading information. If the country is deemed a currency manipulator, tariffs will kick in against the country to counteract the unfair trading advantages granted by the currency manipulation. This could potentially start a trade war with China, which would certainly negatively impact both countries and the entire global economy.
- Affordable Care Act: With a Trump presidency and Republican Congress, the threat of repealing and replacing Obamacare will likely be acted upon. However, it is still very unclear what it will be replaced with, again leading to significant uncertainty for a major sector of the United States economy.
- Federal Reserve: Trump has been highly critical of Fed Chair Janet Yellen, whose term ends in February 2018, as well as recent Fed policy decisions. While the Fed is ostensibly independent, any act to interfere from the President or Congress would almost certainly be a market negative. On the other hand, if significant market turmoil follows Trump’s victory, it could cause the Fed to delay raising interest rates and be a short-term positive for the market. Longer term, however, normalization of interest rates should be seen as a positive because it shows the Fed’s confidence that the US economy is on firmer footing.
Implications for client portfolios:
At GGS, we take a long-term approach to investing in the stock market and do not attempt to engage market timing by raising large amounts of cash when things look bad or uncertain. Indeed, when volatility spikes and investors are highly pessimistic, it is often a good time to be buying into the market. Things are often not as bad as they initially appear, and while the market certainly can experience significant periods of volatility, we continue to believe that the best long-term strategy for making money is to stick to your investment plan and stay continuously invested in high-quality companies.