Trump Triumphs… Now What?
November 9th, 2016
What was considered nearly impossible on the start of election day happened last night as the U.S. electorate voted Washington outsider and businessman, Donald Trump, to become the 45th president of the United States. Investors now must wrap their minds around this previously unforeseen outcome. Here is our quick headline analysis.
1. Don’t panic, instead think opportunistically.
It’s a simple fact: markets react to major unexpected events. However, history also tells us that knee-jerk panic reactions more often than not lead to seller’s remorse. Despite certain pockets of despair from last night, the sun is up today and commerce is moving forward. If markets descend irrationally, think opportunistically.
2. Markets didn’t bet on a Clinton victory, so no major retracement is necessary.
Even though the mass media was moving with certainty of a Clinton victory, markets were clearly not! In the months leading up to the election markets were nearly frozen in uncertainty. Since July 31st, the S&P 500 total return index was only down about 1%, while volatility flattened.
This was in stark contrast to the Brexit vote where the European stock index was up over 8% in the eight days preceding the referendum. In essence, US market participants have been hedging an outcome in either direction and no great retracement is needed based on the surprise outcome.
3. The economy matters more!
In the spirit of James Carville, former strategist for the 1992 Clinton campaign, “It’s the economy, stupid!” Time has proven the economy matters more than surprise events. When cooler heads prevail, intelligent investors will find the economy growing at an improving pace and corporate earnings on an improving trajectory. If a pullback occurs, there are many investors that will find it an attractive time to buy, and thus, making it short-lived.
4. When it comes to policy, Trump offers a bullish case.
With a Republican sweep, we now see the chance for campaign rhetoric to become reality. At the top of the list is corporate tax reform. Next, would be infrastructure spending. Both ideas carried weight during the campaign, but these bullish reforms can’t come soon enough. If passed quickly, it could supply an important stimulus to a long and maturing expansion.
5. Trump’s victory raises uncertainty at the Fed.
The election of Trump could be perceived as a mandate to clean up a government that has exceeded its proper boundaries. In this regard, the Fed has a target on its back. Many critics see the central bank as too heavy handed in markets and too supportive of bad federal spending policies.
In retrospect, Trump’s campaign critiques of the Fed were really his attempt to discredit rising stock markets under a Democratic presidency. What we don’t know, though, is how sincere he was, or how interventionist he will become with current policy leaders. Will Trump clamp down on central bank powers? Will he cut short Yellen’s present term and seek a Fed leader with a different vision than the one we have?
In summary, the core economy always carries inertia into an election, and history shows that election outcomes don’t completely throw that off track. The fundamentals always matter, and current fundamentals show a modest but reaccelerating growth rate. Additionally, a return to positive corporate earnings strengthens the bullish case. The president eventually will exercise policy influencing markets; however for now, the inertia of the economy trumps Mr. Trump!
Christopher Riggs, J.D., CFP®, is the President of Alphalytics Research. To learn more about Alphalytics Research or the Economic Systemic Risk Index, please contact us at email@example.com.