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2016 Election Analysis

2016 Election Analysis

Brenna Baucum - Friday, November 11, 2016

We know many of you have spent the last couple of days reading. Reading headlines. Reading email forwards. Reading posts and shares on your social media accounts. We wanted to give you our take on the election results this week, and appreciate you making this one of the many things you will read today.

As votes were counted and the outcome started to become clear on Tuesday night, there were several predictions about how the markets would react. While it’s true that S&P 500 futures and some international markets experienced swings of over 800 points overnight, they mostly tempered by the time Wall Street opened Wednesday morning. The day actually ended just under a record high with Thursday’s close setting that record for the Dow Jones. News outlets like to predict and report wild movement, but it’s important to remember that even if they materialize, many are short term reactions. It was only a few short months ago that we saw the surprise result of the Brexit vote dip the markets nearly -6% in two days, only to see them rebound to even within another week, as if Brexit never happened.

We’ll never know if a Hillary Clinton election would have meant more or less volatility than what we may see over the next several days and months, but we do know that she represented a ‘known’ quantity in continued current administration policies. Donald Trump has been a wild card throughout this election. If there’s one thing the markets hate, its uncertainty.

How might a Trump presidency impact investments and policy going forward?

Policy Area

Possible Impact

Regulation

There will likely be some regulation changes that impact business flexibility and may act as a positive for business sentiment. Financial regulations may ease or shift the current standing with policies like Dodd Frank and the pending Department of Labor fiduciary rule.

Infrastructure

This was an area that both political candidates agreed on that needs attention and funding, so it will be no surprise to see focuses on modernizing domestic structures; this could boost the job creation effort.

Tax Law

There have been several suggestions on ways to lower rates and reform the corporate tax structure; this could help push more money into the economy.

Global Trade

Trump has not been coy about his plans to renegotiate and review NAFTA and TPP; this could result in less globalization.

Defense

Republican lawmakers have proposed several ways to increase defense spending, though it could be tempered if global involvement declines as a result of changes to current trade policies.

Energy

There is a possibility of increased domestic and shale production with less focus on environmental concerns.

Gridlock

This is debatable, but with one party in control of the House, Senate and White House, there could be a break in the gridlock that has frustrated voters for many years.


You have heard us talk about investing fundamentals before. Making drastic, long term investment decisions based on politics has never been a sound strategy for success. Our recommendations remain the same today as they did last week, last year, and over the last several decades. Money that you need to spend in the short term should not be subjected to market fluctuations and should be invested conservatively. Long term money should be invested for the long term. Do not let temporary market fluctuations or your emotions influence your long term investment goals. We encourage you to hang tight, and turn off the news when it all feels a bit too much.

Here are a few investment-specific considerations.

  • U.S. equity markets. If plans for economic growth are effective, the result should be stronger company earnings growth, which could propel equity prices (if all goes in the typical direction). The pre-election problem was the lack of certainty in policy, which appears to have been alleviated somewhat, but could still rear its head if Trump makes unpredictable policy statements. At the same time, any pullbacks in global trade could affect U.S. equities, as a third of S&P revenues originate from markets outside the U.S. At the same time, market valuations are no longer cheap and have priced in improvement, which could temper reactions.
  • U.S. bond markets. Low rates in the U.S. and globally have been a byproduct of slow growth, and, hence, low inflation. Markets are pricing the Fed to move short-term rates higher in December, and, as the large oil price declines of late 2015/early 2016 'roll off' the trailing 12-month charts, inflation looks to normalize higher. Rates have moved sharply higher over the past week, due to these reasons as well as anticipated government deficit spending, which would weaken the U.S. credit standing. However, interest rates are notoriously volatile. Many of the offsetting technical demand drivers of U.S. bonds remain in place due to conditions abroad—rates in other key markets such as Japan and Europe remain very low, enhancing the appeal of U.S. treasuries.
  • Foreign equity markets. Emerging markets have come to mind as a potential problem area if Trump's more restrictive/protectionist trade policies are implemented as advertised, as these nations are heavily dependent on free global trade. These same trade factors could also affect developed markets; but more importantly, several countries in Europe are holding their own elections soon and facing similar nationalistic issues that could drive local sentiment to a larger degree. Cheaper pricing continues to reflect this foreign market uncertainty.
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