Make way for change
Tuesday night marked the culmination of the most bizarre presidential race that many of us have ever witnessed. The dust that got kicked up during this political battle will take some time to settle. It could be months, even years.
As in most cases where sudden changes or surprises occur, it’s usually best to sit tight, catch your breath and pause. With respect to investment strategy, in spite of the astonishing bounce in the stock market in the last few days, a thick cloud of uncertainty still prevails. A word of caution is appropriate here — making reactionary changes rooted in emotions could harm your long-term financial health.
Before November 8, the most recent significant shock to the financial markets occurred after the UK’s Brexit vote in late June, which, it is safe to say, did not go as most had expected. While there was an immediate sell-off in global markets, the subsequent rebound was stunning. If fact, at a recent close, the UK FTSE 100 index was actually up about 9% for the year, leading the entire Eurozone. Go figure.
We can expect to see many changes in both governmental policies and the financial markets resulting from Trump’s win. While just scratching the surface, here are six that most likely will ensue.
1. Volatility will likely go up
We’ve expected this in the past, only to see markets remain fairly quiet. However, Trump has shared few policy details and was elected as an agent of change. It is reasonable to believe that he and his administration will say and do things that surprise or unnerve market participants who have become used to the “low-vol” status quo.
2. Interest rates probably won’t climb much — unless Yellen is replaced
Interest rates quickly jumped after the election, and could continue climbing in the short- term. However, since we’re still facing a weak economy, don’t expect rates to go up much more. As an aside, dovish Fed Chair Janet Yellen and hawkish Trump don’t appear to see eye to eye regarding where interest rates “should” be. Expect Yellen to be replaced when her term expires in February of 2018 with someone more willing to increase rates.
3. Tax reform and fiscal stimulus are heading our way
Trump has indicated he will spearhead both a meaningful infrastructure spending plan and tax reform for both individuals and corporations. Expect a push for lower corporate and individual tax rates and incentives for companies to repatriate some of the estimated $2+ trillion in profits that are currently held off-shore. These two initiatives are expected to receive bipartisan support.
4. Big pharma and biotech companies will face more pricing pressure, after short-term relief
The stocks of companies in these two areas have performed quite poorly this year, due in part to fears of heightened regulation and pricing pressure from a Clinton presidency. With Trump winning the election, many companies in these sectors have jumped, as they may perceive a friendlier environment going forward. However, Trump has been quite critical of the inefficiencies in our health care system and of high drug prices, compared to those in other countries. As the Affordable Care Act is either reworked or replaced, expect these industries to again face some degree of pricing pressure.
5. Defense stocks will rise
Trump has pledged to spend heavily to rebuild our military readiness. On the campaign trail a few months ago, he called for Congress to reverse cuts to defense spending that were enacted under the 2013 budget sequester. While the level of spending increase is not yet determinable as a result of this pledge, we will mostly likely see defense stocks rise.
6. Trade protectionism will increase
One possible (and negative) wild card is Trump’s talk of trade protectionism. Trump has stated his intention to renegotiate NAFTA, exit the Trans-Pacific Partnership, and to label China as a “currency manipulator.” These actions could hurt industries and companies that depend on global supply chains. Emerging markets (EMs) could also suffer disproportionally (at least in the short-term) as a result of any anti-trade measures, although longer-term, valuations in EM countries generally remain attractive. Restrictive trade policies would also be expected to put pressure on the dollar, which has been strong this year.
While we have no crystal ball that lays out our future, we can be sure of one thing. Change is coming. Whether this moves us to cry in our soup or stand up and cheer, it’s best we all buckle up and get ready for a new ride.
Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.
