Below is a summary of observations and expectations following last night’s election results:
- Similar to the Brexit results (e.g. when the U.K. voted to leave the E.U.) earlier this year, the election results confounded polling experts who predicted a clear path to victory for Clinton.
- While few predicted a Republican sweep, the markets appeared to be placing a higher probability of a Trump victory than the polls suggested by declining roughly 5% from the end of August through last Friday. Markets typically perform better leading up to an election if they expect the incumbent party to win since it means more policy certainty and a continuation of the status quo.
- Why would markets decline on a Trump victory? Very simply, markets don’t like uncertainty. It is exactly what we experienced post Brexit and it was a mistake to sell into it. It is common for stocks to experience weakness after a new administration in elected. Weakness is likely to prove temporary. Donald Trump has never held political office and people are not sure how he will govern. The markets will worry about his trade policy the most, which reflects the worldwide push-back against globalization and rising populist sentiment in countries around the world. People worried about extreme policies often overlook that markets serve as a disciplinarian for policymakers, encouraging more moderate policy stances.
- The following appears to be Trumps primary objectives:
- Tax reform by simplifying income brackets and cutting the corporate tax rate (corporate tax reform will likely take priority)
- Supreme Court selection
- Repeal and replace Obamacare, allowing people to purchase insurance across state lines
- Increase defense and infrastructure spending
- Trade-related policies
- Roll-back regulation
- Immigration reform and security
- Trump appears to have a penchant for supply side economics of lower taxes, deregulation, spending and debt. Clinton would have represented a continuation of the recent policy mix — easy money, tight regulation, moderately stimulative fiscal policy and neutral on trade. Government spending has been a drag on growth for most of this cycle, but we expect the policy baton to switch from monetary to fiscal policy. Increased fiscal spending, deregulation, lower tax rates and repatriation of overseas corporate monies should be a positive for U.S. growth.
- Here are some potential investment implications of the election results:
- We would not be surprised by short-term weakness in areas of the markets given policy uncertainty, but we would generally view it as a buying opportunity since fundamentals remain reasonably healthy. Prices follow fundamentals longer-term. As shown on the bottom of page 2, we remain in a favorable phase of the Presidential Cycle.
- Increased spending, faster growth from tax cuts, protectionist tactics, and job growth should support higher inflation and interest rates. We like inflation-linked strategies within bond portfolios.
- Companies with the most cash as a percentage of market capitalization should benefit from repatriation of corporate cash overseas (examples include CAT, CSCO, MRK).
- Success in stimulating growth should benefit cyclicals over the stable-growers/low volatility strategies that have benefited from the recent low growth/low rate environment and are expensive. We caution against sectors such as Utilities, domestic REITs and Staples.
- Primary sector beneficiaries:
- HealthCare: Efforts to repeal and replace Obamacare removes the risk of drug price controls, which should help Pharmaceuticals and Biotechs, leading to solid rallies in these stocks. HMOs and Hospitals are likely losers from Trumps policy initiatives.
- Defense/Industrials: The defense budget is likely to see a meaningful increase and defense companies and related industrials (BA, UTX etc.) should benefit.
- Energy: These stocks will trade on supply/demand fundamentals. Energy policy should help infrastructure-related stocks such as MLPs.
- Financials: The sector should benefit from the effects of higher interest rates along with efforts to reverse regulation.
- Elections trigger strong client emotions and we have a very divided electorate. Clients should remain focused on long-term plans and goals.
- Fund managers will respond to changing sector/industry dynamics relating to the election. A number of active managers in portfolios have cash positions that can be deployed in the event of near-term weakness.
- We will be hosting an Inside the Markets conference call non November 17, 2016. On the call we will be providing a market review, discuss the election outcome and investment implications, and cover year-end planning strategies.
PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included inthis report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.