Trump’s Impact on the Markets

Tab 1

November 14, 2016


Decreasing regulations and lower tax rates are cornerstones of Trump’s platform.

 

With the election of Donald Trump as President of the United States and Republicans retaining control of both the Senate and the House of Representatives, much of what happens in the markets is still up for debate.

 

The election of a non-incumbent president is always a potential trigger for market volatility. In fact, the S&P 500 has dropped an average of 3.3 percent in presidential election years where no incumbent is seeking re-election, and markets generally tend to experience volatility in governments dominated by one party, according to data from Strategas Research Partners (see accompanying graph, “Markets cautious in non-incumbent elections”).

 

Additionally, Donald Trump’s unpredictability and lack of position on several policy issues may lead to particularly heightened market uncertainty. This uncertainty could cause a flight to safe-haven assets (such as gold and T-bills), which could lead to an underperformance of credit and bias the market toward lower equity prices and higher bond prices.

However, U.S. Bank strategists  note that the factors driving the global investment landscape are far larger than any one country’s election results, and therefore Trump is unlikely to significantly alter the investment landscape within the next 12 to 18 months.

 

Trump is also unlikely to affect the authority of monetary groups like the Federal Reserve, so it’s likely that riskier asset classes may eventually stabilize and possibly play out as more market-friendly. Equities, for instance, are expected to experience a short-term drop before stabilizing in 2017.

Tab 2

November 14, 2016


U.S. Bank also expects the change in leadership to impact individual industries and sectors far more than the broad equity and fixed-income categories. Many of these sector-specific implications will play out over time, though areas that may benefit under Trump’s leadership could include:

  • Financial institutions and oil and gas production companies, with his push to decrease regulations.

  • Railroads, mining and metals companies, due to his goal to improve infrastructure fields like railroads.

  • Technology, due to lower taxes, and the emphasis on bringing jobs that had previously been outsourced back to the United States.

Meanwhile, Trump has noted his support for repealing Dodd-Frank and generally reducing regulations on banks. Trump also has expressed interest in eliminating the Consumer Financial Protection Bureau, which could benefit credit card companies but be a negative for individual consumers.

 

Trump is also a strong critic of the Clean Power Plan and the Environmental Protection Agency, and he

could make overturning the EPA’s regulations a central point of his administration.

 

Other potential changes include:

  • The end of genetically modified food labels, which could benefit food companies.

  • The long-contested approval of TransCanada’s Keystone pipeline, which could benefit drillers and pipeline companies.

  • A rise in military spending, including the updating of weapons and equipment, which would benefit defense contractors.

Another cornerstone of Trump’s campaign (which he is expected to continue to push) has been stopping the Trans-Pacific Partnership. Generally, Trump’s advocacy for keeping industry in-country and lessening America’s reliance on other nations could mean very few (if any) new trade deals in the coming four years. He has proposed revoking the North American Free Trade Agreement, as well as imposing tariffs on imports from Asia and on U.S. companies that are manufacturing abroad. His hope is that this directional change will ultimately benefit the United States by bringing jobs back home, but some economists have suggested industry will simply turn to other countries. This also could force businesses to increase costs and therefore raise prices on consumers.

Tab 3

November 14, 2016


However, it is important to bear in mind that Trump is widely expected to have difficulty getting some of these proposals passed. For instance, many of Trump’s plans would increase government spending, while the Republican majority is interested in reducing America’s debt.

 

Similarly, Trump is a strong advocate of decreasing the corporate tax rate, which could be a short-term win for individuals but ultimately could require the government to borrow more or spend less. It’s likely that Congress will require Trump to compromise on his plans, which could contain this agenda.

 

 

 

 

 

 

 

Meanwhile, Trump’s focus on toughening border restrictions may hurt fields such as agriculture, retail and construction, which often attract immigrant workers. Overall, the push for reformation of the immigration system could force businesses to employ more costly (and ultimately economy-stalling) alternatives.

 

Ultimately, we expect the U.S. and global economies to continue their slow growth into 2017, and advise long-term investors to stay the course with their existing investment plans. For more information on how this change in leadership may impact your investment portfolio, contact your Wealth Management Advisor at The Private Client Reserve of U.S. Bank.