The Post-Election Markets

Posted 17 Nov 2016 by Rick Irwin, CFP, CLU

A week ago, much to the surprise of stock market analysts, the media, pollsters and pundits alike, Donald Trump was elected the 45th President of the United States, ending one of the most bitter and divisive campaigns in US history. After the similar surprising win in the UK referendum to leave Europe earlier this year, I was personally disappointed, but not totally surprised, by the outcome. Like Brexit, the feeling was, were Trump to win, the markets would probably respond very poorly in the immediate aftermath of the unexpected outcome but then normalize within a few days/weeks once they had a chance to process the new situation.

How did the markets react?

Surprisingly, the reaction by the US stock market after Trump was declared President was incredibly benign. While stock market futures were pointing to a very sharp drop at the opening bell, the sharply contrasting conciliatory tone of President Elect Trump’s victory speech, along with some of the points below, smoothed things over considerably and the US markets actually closed on a positive note on a day where most were expecting a Brexit-like negative 3-5% shock to the system.

The day after the vote I participated in several conference calls put together by some of the mutual fund companies I work with and have had lots of other feedback and updates since then. The reaction of the markets has been quite different than expected and I wanted to wait until I had time to hear from fund managers and process as much information as possible before sharing my views on what this result might mean for you.  Putting the pieces together, the consensus seems to be that the stock market is choosing to look at the potentially very positive elements of Mr. Trump’s campaign and adopting a “wait and see” approach to his more controversial ideas.

How could the markets react in the future?

Much will depend on who he chooses to help him govern, which will be particularly important knowing he has not previously held a government office. Given the far right radical element of his campaign, including trade and immigration, there is probable cause for concern in who he selects as his top advisors.

What are the potential positive outcomes?

Looking at the brighter side of Trump’s campaign promises, we can see why the markets are responding with tentative optimism:

  1. Increased infrastructure spending: this is an area where both candidates agreed and can be one of the most stimulating things governments can do to grow the real economy and which has a lasting societal impact. The defense sector will also be a big benefactor of increased government spending initiatives.     
  2. Allowing a one-time amnesty period to allow corporations to bring back a large portion of the estimated $2-$3 trillion dollars of foreign-held profits that have not been taxed in the US. This would involve a low tax of perhaps 10% to “repatriate” these profits and it is widely expected that this revenue would be used to help fund the very ambitious infrastructure projects outlined above.
  3. Huge corporate tax cuts: the largest the US has ever seen that could bring the corporate tax rate down from 35% to as low as 15%, though this would likely take some time to implement. Economists generally see corporate tax cuts as being the most stimulating forms of tax cuts as they tend to translate into more certain economic benefits. As with the repatriation of foreign cash mentioned above, corporations will do one of several things with the increased after tax profits: enhance investment in plants, equipment and research and development to be even more competitive; return more income to shareholders through increased dividends or share buybacks; or engage in hopefully accretive mergers and acquisitions. Lower taxes mean increased profits which support higher share prices. It also represents a huge loss to government tax revenue so it’s a bit of a gamble on his part that the resulting increased economy activity, including the trickle down wealth effect to investors, will offset that.

Likely as a result of the above, the reaction of the stock market so far has been largely positive. The bond market however has responded very poorly by what they see as a coming period of unprecedented spending. Mr. Trump’s history as a real estate mogul has certainly not come without an affinity for ambitious use of debt and massive new issuance of government debt would be bad for US bonds.            

Where does this leave Canada?

Again, surprisingly given Trump’s very negative stance on trade, the impact on the Canadian stock market, and the Canadian dollar in particular, was much less drastic than expected. The positive impact for Canada has largely to do with oil. Oil is priced in US dollars so a lower loonie means more competitive prices for Canadian oil producers not to mention the controversial Keystone pipeline will undoubtedly be given green light status under Trump. It’s widely viewed that Canada stands to be a loser if Trump renegotiates NATFA but it’s more likely that his intended target is Mexico. Canadian manufacturing is a key element in the US industrial complex (auto parts, for example) so it’s unlikely the manufacturing sector in the US would want large tariffs on Canadian exports.    

The point of this note is not to put a positive “spin” on an election result that certainly has its good, bad and ugly sides. Whatever happens over the next four years, the US will ultimately have to reconcile the bitter divide that led to this outcome. Like Brexit before it, the “silent majority” of the working class has fought back against a system they view to have benefitted those at the top and voted for change. My job however, is to talk with the investment professionals that manage my clients’ funds and assess the impact of these events on these investments. So far the election outcome, at least as it pertains to the investment outlook over the next few years, is being seen as largely positive by the markets but caution will be needed as Mr. Trump transitions to power and we get greater clarity on Trump as President and what campaign promises he tries to enact and which ones are left on the campaign trail.

As always, if you have any questions or concerns do not hesitate to contact me at any time.