The outcome of the U.S. election was a surprise; the initial market reaction was not. As we always do, we now turn our attention to what happens next by evaluating the intersection of policy and economy in the context of current market prices.
What follows below is a structure we are using to help us evaluate how President Trump (PT) will differ from Candidate Trump (CT) on the key themes that will drive markets over the coming months. We will continuously update this as we digest new information and will communicate any material changes in our view.
As of now, the outcome of the election has not changed the primary views reflected in our strategies: Modestly overweight risk assets (equities and high-yield bonds) relative to high-quality bonds and overweight U.S. equities relative to developed international equities.
- Campaign rhetoric implied extreme measures: withdrawal from NAFTA and/or WTO, imposition of tariffs and labeling of China as a currency manipulator
- Likely that Trump will be forced to tack back a bit toward the center on trade policy due to Republican party division and its slim majority in Senate
- Executive powers provide Trump significant ability to act unilaterally on trade policy relative to other areas; more extreme measures less likely as they would alienate factions of the party
- Relative to other themes, we see President Trump behaving very similarly to Candidate Trump
- Broad tax reduction should be supportive of economic growth (largely adopting the Ryan tax plan)
- Low charge on repatriation of earnings would be a significant positive for U.S. equities
- As infrastructure investment has bipartisan support, we believe that it is likely to happen, though perhaps below Candidate Trump’s proposed $550B
- Difficult to reconcile meaningful increases in government spending with lower tax rates
- Related to both taxation and government spending is likely pushback from Tea Party if deficit is expected to increase significantly
- Deportation of primarily low-skilled undocumented immigrants will be a priority; could stoke mild wage and price inflation due to a shortage of low-skilled workers
- Fewer changes expected to skilled immigrant visas favored by the tech and financial sectors
- Potential to reverse Obama policies on protections for undocumented workers
- Moratorium on new regulation and a broad re-evaluation of existing regulation
- An area of focus due to easy implementation and close alignment of Trump’s plan with the mainstream Republican ideology
- The reduction in regulation bodes well for domestic firms overall
- A rethinking of NATO and other bilateral defense agreements
- Mike Pence and the cabinet could push foreign policy towards a more traditional Republican bent
- China and Russia could gain geopolitical clout as traditional U.S. allies globally move towards broader alliances
- Fed: Janet Yellen’s term will not likely be renewed once it expires January 2018, but staggered terms of the Board of Governors prevents wholesale changes. We still expect a Fed hike in December.
- Cabinet: Trump likely to tap many of his top advisers – Rudy Giuliani, Newt Gingrich, and Steve Mnuchin – to fill cabinet posts
- Supreme Court: Trump will have at least one nominee and potentially as many as four total; majority of court will have been nominated by a Republican President.
Putting it all together
While our baseline scenario for modest but below-trend economic growth remains, both the upside and downside scenarios have increased in probability. While lower taxes and less regulation would be supportive of an economic surprise, an isolationist policy stance could lead to less trade, lower global growth, and ultimately lower U.S. growth. Additionally, we feel upward pressure on inflation will result due to a number of proposed policies (infrastructure spending, tax cuts, restrictive immigration policies, etc). Though today’s focus is squarely on the U.S., we caution investors not to lose sight of the referendums and elections in Europe over the coming months that could potentially have a more significant impact on markets.