President-elect Trump and Market Reactions

The late-night result from Tuesday’s election was a bit of a shock to pollsters, pundits, and the general public. A shock, but maybe not a surprise given the tight and contentious race that preceded it. Any market volatility is understandable, since we don’t know which policy priorities President Trump will implement. Although the House of Representatives and the Senate are both under Republican control as well, it is not clear how the relationship between the executive and legislative branches will evolve and which measures from the new president they will pass.

If we see tariffs, shredded trade agreements, deportations, and a border wall, a recession in 2017 wouldn’t be a surprise. But if the administration’s focus is on tax cuts, deregulation, and fiscal stimulus through infrastructure spending, we could see an acceleration in U.S. growth. Investor and media attention will be on comments from the new president to see where his true priorities stack up.

In the near term, investors should be cautious of buying dips in equities too early. Consumer spending may weaken, particularly if minorities feel less confident. Consumer uncertainty could spike as well if a potential loss of health insurance through repeal of the Affordable Care Act weighs on the mind of the public. There is also a possibility that, if extreme, market volatility and uncertainty will put the U.S. Federal Reserve on hold again in December.

But in the longer term, the U.S. private sector remains highly competitive and U.S. equities, especially with solid domestic earnings, should continue to do well. If an environment of lower taxes and fiscal stimulus takes hold, yields may go up more next year than previously expected. Expect some vulnerability in emerging markets and commodities. With an inexperienced and apparently bellicose new president, defense stocks may be among the few near-term winners.

Earlier this year, Brexit was a political move for isolationism and against trade. So is this victory for Mr. Trump. Is there more to this story from Europe in 2017, perhaps with a French or Italian flavor? If so, this anti-trade sentiment would tend to reduce global growth, and emerging economies are particularly dependent on trade.

Check back Tuesday, November 15th for a videocast with more of my thoughts on the impacts of the U.S. elections. In the meantime, you can visit our dedicated landing page for all election-related content from Principal Global Investors.

 

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