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Special Report - 11/9/16

  • Troy Frerichs, CFA - Director, Wealth Management & Financial Planning
  • Jeff Clark, CFA, CFP® Manager, Investments & Wealth Management
  • Kent Anderson, CFA - Senior Investment Officer
  • Andy Finks, CFA - Investment Officer
  • Todd Bunton, CFA - Investment Officer
  • Chelsie Moore, CFA, CFP®Investment Officer
  • Jonathan Strok, CFA - Investment Associate 

Key Points

  • In a surprising victory, Donald Trump has been elected the next President of the United States. Meanwhile, Republicans retained control of Congress.
  • After initially selling off overnight, the U.S. stock market largely shrugged off the results when the opening bell rang.
  • We believe that investors should resist the temptation to make major changes to their investment strategies based on the election outcome.

Despite many polls and pundits declaring him somewhat of a long shot, Donald Trump has been elected the next President of the United States. Similar to the Chicago Cubs coming back from a 3-1 deficit to win their first World Series championship in 108 years, Trump surprised all but the most diehard fans with his victory. Additionally, Republicans retained control of Congress, including the Senate, which many thought would go to the Democrats. 

The news initially rattled financial markets around the globe as investors were also surprised by the outcome. However, the U.S. stock market was largely flat by the time the opening bell rang on Wall Street. We believe that the election results create some uncertainty going forward for investors, but as we wrote in our 2016 outlook, historically, it hasn’t mattered much for the stock market who is in the Oval Office. We do not think that investors should make major changes to their investment strategies based on this election either.

As the Greek philosopher Heraclitus said, “the only constant is change”. This is true for investors too. The U.S. economy and stock market have seen tremendous change over the course of the last century and, yet, have still managed to deliver excellent results over the long run. We don’t think Tuesday’s results change this.

What a Trump Presidency Could Mean for the Economy and Markets

It is difficult at this juncture to know which of President-elect Trump’s policies will be implemented. Unlike past presidents whose parties have also controlled Congress, Trump is likely to receive pushback from his own party on certain issues. However, there are several key issues that suddenly come into play.

Trump’s pledges of cutting corporate and individual income taxes, repealing and replacing Obamacare, and lifting major regulations in the banking and fossil fuel industries are likely to be well-received by a Republican Congress. Many of these moves could be a boon to corporate profits, and, ultimately, the stock market. In fact, the financial, health care, industrial and energy sectors were all posting strong gains in early trading on Wednesday.

Regarding tax reform, President-elect Trump has pledged to cut the corporate tax rate from 35% to 15%, as well as reduce the number of individual income tax brackets from seven to three while reducing the top rate from 39.6% to 33%. If pushed through, this would represent the most significant change to the tax code since 1986.

However, President-elect Trump could very well receive resistance from members of his own party on issues of international trade and immigration. Trump has vowed to exit certain international trade pacts and increase tariffs on imports from China and Mexico. This message clearly resonated with voters in the Rust Belt, which was key to him winning the White House. Nonetheless, a Republican Congress isn’t expected to rubber stamp his proposals on these issues. Trump has also pledged to significantly increase infrastructure spending, but more fiscally-conservative Republicans may balk on this issue as well.

President-elect Trump will also make several key appointments early in his term. One of the biggest will be a Supreme Court justice to replace the late Antonin Scalia. Another important one will be a Federal Reserve Chairman in 2018, when current Fed Chair Janet Yellen’s term expires. With regards to the Supreme Court, Trump is expected to appoint a conservative Supreme Court justice, which shouldn’t have much trouble passing through a Republican-controlled Senate. Regarding the Fed, Trump has been critical of Janet Yellen before and stated that he probably wouldn’t nominate her as Fed chief again. This could potentially change the course of monetary policy.

Tuesday’s surprise outcome also initially cast some doubt on an interest rate hike by the Fed in December. Based on early futures pricing, the odds of a December hike decreased significantly following Trump’s surprise victory. However, these odds quickly recovered by late morning and were essentially unchanged. Additionally, long-term interest rates have jumped, with the yield on the 10-year Treasury note crossing above 2% for the first time since January. This move could be in reaction to Trump’s pro-growth economic agenda, as investors view the “reflation trade” as back on.

Overall, Trump ran on a platform of change, and that is likely to create some uncertainty for the economy and financial markets going forward. There are still major question marks around global trade and immigration, for instance. Both of these issues have serious ramifications for long-term economic growth. However, there could very well be some policies enacted that are positives for the economy too, such as tax reform and reduced regulations.

Summary

Donald Trump’s victory was a surprise to many, including the financial markets. After initially selling off, the U.S. stock market largely shrugged off the news, with some sectors rallying sharply. We believe that a Trump presidency and Republican-controlled Congress are likely to create uncertainty for the economy and financial markets going forward as investors decipher key policy changes.

However, we do not recommend investors make significant changes to their investing strategies based on who is in the Oval Office. Long-term investors have traditionally been rewarded for embracing uncertainty and riding out volatility. That thesis remains in place even with President Trump in the White House.

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