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Question of the Week - November 14, 2016

What does a Trump Presidency mean for investment markets?

Guest Post - Monday, November 14, 2016

What does a Trump Presidency mean for investment markets?

Here's a quick snapshot of possible repercussions from Tuesday's election results. This is not exhaustive by any means, and is focused on economic/financial as opposed to societal issues. Some of these polices are based on traditional Republican positions, whereas others are more Trump-specific. Note that several of these policy priorities could be longer-term in nature, requiring legislative discussion and action, so any opinions at this point are speculation.

  • Regulation (general). Republican administrations tend to be less 'regulatory' overall as a general rule. Policymakers have pointed to the deluge of regulations issued during the Obama administration as overkill, requiring a pullback. In addition, several well-regarded economists have acknowledged 'over-regulation' as a key problem that has undermined business flexibility and expansion plans in recent years, which has led to the byproducts of lessened capex spending, etc. A more business-friendly (i.e. scaled back) regulatory environment has the potential for unleashing more corporate creativity and spending, which could boost growth.
  • Regulation (financial sector). The election results caused financial stocks to rally almost immediately, as Republican administrations also tend to be more partial to laissez faire practices in the banking industry. This could result in a watering down of Dodd-Frank regulations drafted in the aftermath of the Great Recession (done to help prevent a similar meltdown again, although the appropriateness and success of that effort continues to be debated). More specifically to the securities/financial advice industry, the recent Department of Labor standards in their current form—which have been described as onerous to some degree in their focus, level of detail and timelines—are in jeopardy.
  • Infrastructure. Both candidates described this as a major priority, due to the poor condition of America's domestic structures. While an expensive effort, likely to add to the deficit and overall Federal debt, it also has the potential of being a job creator—in a similar vein to FDR's domestic work programs of the 1930's, even if less dramatic. This resulted in bullish sentiment for industrial and construction firms.
  • Tax policy. Republican administrations tend to be adherents of lower taxes, whether coupled or not with Reagan-style trickle-down economics, where lower rates for businesses are believed to create more spending and growth, which translate to more and better jobs, and hence, more consumer wealth and spending, which perpetuates the cycle. Of course, such policies have to be balanced against the need for the Federal government to earn enough tax revenue to support essential services, service the debt, as well as pay for long-term liabilities like Social Security and Medicare. Tax reform is another element of this, which includes Trump's promise of lower personal and corporate tax rates, ability for U.S. firms to repatriate monies back to the U.S., as well as a far simpler tax code overall (although the latter could be more of a longer-term effort). However, the fact that Republicans control the House and Senate certain raise probabilities of successful action.
  • Global trade. This has been a key campaign issue for Trump. Traditionally, however, trade has been a minefield for politicians due to the complicated web of costs and benefits. Free trade offers strong economic benefits generally by reducing the overall costs of goods and allows countries to produce goods/services where they're able to most efficiently. This is great for cheaper foreign imports, but not always a great deal for displaced higher-wage domestic workers (to whom Trump has been making appeals, particularly in Rust Belt states). He has vowed to review or renegotiate trade agreements (e.g. NAFTA, TPP), which could lead to possible lessened globalization. This is truly a wildcard in coming years. At the same time, trying to 'undo' this long-term trend could be futile, which has been spurred by technology as much or more than by cheap labor.
  • Healthcare. Republicans have never been fans of the Affordable Care Act (Obamacare) and have vowed to repeal the entire bill as soon as feasible. Whether this can or will be done or not and what it could/would be replaced with is debatable, but chances have increased with a Republican-led executive branch, Senate and House. Work now could turn to what the current system would be replaced with, as simply killing benefits to the otherwise uninsured probably won't be popular. In another area of health focus, pharma/biotech firms also rallied as the Hillary Clinton focus on drug pricing has been averted for now, although Trump has also mentioned the issue.
  • Defense. Republican administrations tend to be pro-defense, which has led to higher defense spending, which translates to investments in military equipment/aircraft/systems/etc.—naturally benefiting related firms. While Trump has expressed a desire for more defense build-up, it could be tempered by his stated preference for avoiding unnecessary foreign entanglements, in more of an isolationist stance that would result in possible lessened spending. So the net effect here remains to be seen.
  • Energy. Republicans have generally favored policies that are pro-energy and pro-petroleum extraction, and in recent years, pro-shale and pro-pipeline, with environmental issues taking on less of a priority. As such, we could see a push for more public and private spending on energy infrastructure, such as the Keystone XL Pipeline. As we've discussed, however, energy firms are much more sensitive to oil prices, which have been under pressure in recent years due to the boost in supply from these same shale projects and improved extraction technology.

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.

Read our Weekly Review for November 14, 2016.

Read the previous Question of the Week for October 24, 2016.

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