November 9, 2016 – On Wednesday morning, many Americans woke up to (or stayed awake for) an unexpected election outcome. At first blush, many aspects of the 2016 Presidential Election appear Brexit-like: UK polling had the “stayers” winning the referendum by three points and the consensus expectation was that markets would drop significantly if the country voted to leave the European Union. The pollsters were wrong, but UK markets held up much better than predicted. Here in the US, polls mistakenly predicted the Democrats would hold the White House. And now it seems like market reaction to Donald Trump’s victory is set to follow the UK’s Brexit pattern.
As of Wednesday, the downside for the Dow and the S&P 500 Index appeared to be less than the declines that occurred after the 2008 and 2012 elections. However, I would note that it is still early and uncertainty remains.
Much of that uncertainty is tied to both the people and priorities of the incoming Trump administration. We do not yet have a clear view of how he plans to govern or who will be on his team. It is also not clear whether he will prioritize social issues or economic issues, as both were major tenets of his campaign. We expect capital markets to react favorably if he focuses on economic issues and less favorably if he makes populist issues, such as restrictive trade policies and building a wall, his first orders of business.
At the margin, Trump’s win last night makes a December Federal Reserve rate raise less of a certainty. We will be watching closely for signs of a reversal from the low interest rate policies of the last eight years. It is possible Fed Chair Janet Yellen may resign given the unfavorable things Trump said about her during the campaign. That outcome would set the stage for more frequent interest rate raises.
It is far too early to comment on long-term trends, but initial market reaction included higher interest rates and a steeper yield curve in anticipation of increased fiscal spending under a Trump administration. We believe stocks associated with global trade – such as Kansas City Southern, which is highly leveraged to the Mexican economy – and health care stocks that benefit from the Affordable Care Act may come under pressure. On the other hand, pharmaceuticals and drug manufacturers may perform well amid expectations that they would benefit from a lighter regulatory regime. Domestic energy and infrastructure stocks may also benefit from anticipation of increased fiscal spending going forward.
For further perspective on the current market environment, I encourage you to read our recent quarterly letter (Bull Market Continues Its Climb). As always, we caution against overreacting to headline news and encourage you to stick with your investment plan as we wait to see how these trends play out in the coming months and longer term.