From the Desk of the CIO
November 9, 2016
Brexit wins. The Chicago Cubs win. Donald Trump wins. Which of those statements is the most surprising?
The Presidential Election is over. Reminiscent of Brexit, the polls showed a Clinton victory as inevitable but the electorate had something different in mind. As of this writing, Hillary Clinton narrowly led the popular vote, but Donald Trump won the electoral college votes, including those from many of the significant swing states such as Florida, Pennsylvania, North Carolina, and Ohio.
For much of the period leading into Election Day, the stock and bond markets took the election in stride. Stocks traded in a tight range until October 24, when the S&P 500 posted nine consecutive down days. We pointed out in our pre-Election commentary and webinar that stock market performance in the three months leading into the election has been a strong predictor of the result. When stock market performance has been negative, the incumbent party has lost seven of eight elections since 1928, or 87.5 percent of the time. Now make that eight of nine elections: from August 8 through November 8, the S&P 500 declined 1.9 percent. Once again, the stock market was an accurate predictor of the election outcome.
Observations on the Results
In addition to winning the White House, Republicans retained the Senate and House of Representatives, albeit with narrower margins. This election has been unique and Mr. Trump at times ran against his Republican brethren. It will be interesting to see how strongly Mr. Trump benefits from Republican ownership of all three government branches. There was a high level of anxiety from investors leading up to the election. Now that it is behind us, there will be a new set of investment opportunities and risks to digest. The implications of the election are numerous, but here are some things we expect:
- Equity volatility will be higher. Mr. Trump is an unknown quantity and every action will be analyzed very carefully. His statements, his tone, his staff picks—all of these will be viewed as leading indicators of a Trump presidency—and the stock market will react on a day-to-day basis.
- Broad support for a plan to repatriate cash held overseas by U.S. companies. This should be largely supportive of stock market performance, as we expect the cash would largely be used on acquisitions and stock buybacks. It would be ideal if the program were structured to support capital investment as well.
- Pharmaceutical and biotech stocks should benefit. Many of these stocks have been priced at very low valuations due to concerns over price controls under a Clinton administration. With the Republicans retaining Congress and taking the White House, plus Proposition 61 failing to pass in California, there is unlikely to be significant pharmaceutical price reform. There will likely be some reform of the Affordable Care Act (ACA), but that process will be slow moving.
- Broadly speaking, defense stocks should benefit as Mr. Trump has discussed increasing defense spending. Also, traditional energy companies (fossil fuels) should benefit at the expense of alternative energy-related names. Financials should benefit from a potentially steeper yield curve and less regulation under a Trump administration.
- The Fed will likely remain on course and hike in December. The odds of a rate hike by the Federal Reserve in December plummeted overnight, and then rebounded back to nearly 80%.
Things to Watch
We will be keeping an eye on many things, most notably:
- Inflation and GDP growth. Mr. Trump’s election platform called for lower taxes and increased spending, meant to stimulate economic growth. We will be keeping a careful eye on inflation indicators and wage growth. Will Mr. Trump stimulate growth out of the 2 percent range we have been mired in?
- 10-year Treasury yields. The 10-year Treasury began the year at 2.25 percent, dropped below 1.35 percent after Brexit, and is now trading back near 2 percent. We expect yields to remain low because of strong demand from institutional buyers, but we will be watching carefully for a breakout in yield.
- The U.S. dollar. The U.S. budget deficit has increased and could move much higher if spending increases and taxes are lowered. A weaker dollar would benefit investments in asset classes outside the U.S. dollar, such as international and emerging market equities. A weaker dollar would also potentially increase inflation and benefit the economy.
For months now, we have told our clients that we did not expect the election to have a major and lasting impact on the stock and bond markets. We did not advocate major portfolio changes in anticipation of the election for that reason. It will take several days to fully process the impact of yesterday’s election results, and we think patience is the best course of action currently. We will look to take advantage of any opportunities arising in this market.
If you have any questions or concerns, please contact your client advisor.