US Election Commentary

Wow – Did not expect that!!!!

 

So, it happened…the polls were wrong, the betting was wrong, and the markets were wrong. Again! – Donald Trump has gone from reality TV show host to President of the United States of America, and we now hope that the rhetoric we have seen over the last six months was just that and he can be the commander in chief that America needs. He is though unpredictable but if an actor can be President, then there is no reason that a business man cannot do just as good a job and we must face the reality of the world we are now in. As a result, Asian markets panicked and fell on the news of Trump’s election victory, led by the Nikkei Stock Average, down about 5%, and the Hang Seng which dropped 3%. Futures this morning, before Donald spoke, were also down circa 5% due to negative sentiment and as I write the FTSE 100 and 250 are now up with all European indices having trimmed much of the losses that we saw at the open.

 

The Reality

 

If we ignore the unpredictability of the man that we have seen so far, the reality is / may not be as bad as many think from an economic perspective, but it depends where you are sat and from what perspective you take as detailed in the summary below:-

 

Positives

 

  1. We have a Republican House, Senate and President and this will hopefully mean his policies can be actioned, but we hope in a moderated way;
  2. He wants to cut taxes, which should be positive for growth;
  3. He wants to cut corporation tax, which will be positive for US corporates;
  4. He wants to invest in the US Infrastructure and create jobs which will be positive for growth;
  5. He wants to allow US corporates that hold cash overseas (circa $2.5 trillion) to repatriate the money and benefit from a lower tax rate, which will increase share buy backs and M&A activity. Both are very positive for equities;
  6. It is likely that due to the win, Janet Yellen will hold off raising rates in December 2016 as widely expected, whilst everyone takes a step back to see what happens next and how the world reacts;
  7. Overall he is going to try and enact a huge fiscal stimulus programme in the US and that should be good for commodities and global trade, subject to some of the negative inward looking policies on trade tariffs not being enacted;
  8. In the short term, his actions are expected to add circa 1.5% to US GDP over the coming 18 months.

 

Negatives

 

  1. His stance on global trade is not positive and he is looking to repeal most trade agreements with the rest of the world, and is looking to apply huge tariffs on China and Mexico and that is not good for global trade growth, but it is a bit like the Brexit in that no one knows what he intends to do and we just have to wait and see and manage what is in front of us when we know. Today, in his speech he made no mention, which is a positive and he may back track on some of his more controversial polices to get Joe Biden (Senate) and Paul Ryan (House) on his side;
  2. His policies that are positive as regards to fiscal stimulus detailed above will create inflation and that will mean it is likely that despite there not being a rate rise in December, the amount of rate rises that we will see through 2017 and in 2018 will be greater;
  3. His spending plans at their highest are forecast to be circa 150% of GDP and he will need to get approval to raise the debt ceiling to get the spending plans approved;
  4. US Treasury yields will increase at the short end and that will increase borrowing costs on money that the US has to borrow;
  5. His overall attitude is to focus inwards and be protectionist, and he sees the US having less influence overseas which worries Europe, because it is perceived that the US would not help stop Russia moving further west;
  6. An environment of higher US Interest Rates will mean a stronger US dollar and that will essentially be bad for Emerging Markets;

 

Overall therefore as we have said in recent weeks, we are not concerned today about the Trump factor and it could be positive in the short term economically and push up US equities. Any wobble we see in UK, US and European equities is sentiment driven at this juncture and not based on anything tangible, bar fear of the unknown and untested, and is mainly down to fear of change. He is now the President though (or will be in the New Year) and he must become presidential and answer to both the Senate and the House, which are both reasonable and will ensure he acts responsibly. As far as how the market reacts beyond the next few days, we can only see the result positive for US equities.

 

Indices and Portfolios

 

Over the last week we have seen equities trade off and pull back due to fear of a Trump win, which is now a reality. Thus, the portfolios have pulled back and although still positive YTD, the rise in volatility and worry will continue to cause increased volatility. It is important to realise that at this juncture what has happened is not an economic event, as the Brexit was, that will have immediate impact on the US$ or be a negative for US trade as Brexit was perceived to be for UK trade. We are therefore agnostic over the action taken by many to hold cash into this event, as we did the Brexit, and have remained invested and intend to stay as we are, with no changes planned today. We have tested many different scenarios including a Trump win, and are happy that the existing fund managers and the underlying asset allocation is correct with very little directionally exposed to Asia and Emerging Markets, which are likely to suffer the most, whilst we assess his first 100 days and see what he does and how protectionist he is.

 

We are therefore watching very closely.

 

 

The coming week

 

The week ahead will be dominated with Trump’s “for growth” agenda and the market will react to every word he says, as they try to find direction and second guess how much the world has changed.  As far as the US, we continue to see strong earnings and 71% are reporting actual earnings per share above estimates (average 6.6% higher) and sales, for 54% of companies that have reported, are 0.5% above estimates so all in we are continuing to see strong earnings from US corporates and have technically ended the earnings recession that has been in existence since Q1 2015.

Have a great week and please do not worry about the volatility, we feel that Trump is a win in the short-term for US Equities once we get used to it.

 

Jason

 

Jason Stather-Lodge  CFP, MCSI, APFS

CEO & Founder

Chartered & Certified Financial Planner

Chartered Wealth Manager