Our Initial Election Thoughts

In a shocking come from behind victory, Donald Trump won the U.S. Presidential election last night.  It was shocking because, as we saw with the Brexit vote in June, most election polls failed to capture the degree of U.S. citizens’ unease and anti-establishment sentiment.  As the outcome became clearer money fled global equity markets–at one point the S&P 500 was down over 5%–and moved into safer assets–10 year Treasury bond yields declined a similar percentage.  As this is written mid-day Wednesday, the trade has reversed and the S&P 500 is up about 1% and 10 year Treasury yields are higher at almost 2% for the first time since early 2016.  So, will President-elect Trump be Good Trump or Bad Trump for markets?

Mr. Trump said many things during the campaign, and the markets’ anxiety (at least as reflected on Tuesday night) seems to revolve around a lack of clarity regarding which policies he will likely want to pursue, which ones he will be able to pursue, and which were simply election rhetoric.  Until his policy choices become clearer over the next several months, this uncertainty will likely result in a high degree of market volatility.

If his first priorities are immigration and trade policy and he pursues them as described during the campaign, they could have a meaningfully negative impact on the economy and asset markets.  Immediately deporting 11 million undocumented workers would be a clear negative for the labor force and housing industry (among others).  Aggressively moving to repeal trade agreements (NAFTA), and unilaterally imposing tariffs on large trading partners (China), would also likely damage the economy.  These are two highly contentious and difficult issues to navigate.  He may have to address them at some point, given they figured prominently in his campaign, but it seems unlikely he will begin his presidency by attacking those issues head on.

It seems more reasonable that President Trump will start with policy measures that are “low hanging fruit,” and are unequivocally good for the economy.  Tax reform/cash repatriation, an infrastructure focused stimulus plan, ending or rolling back unnecessary regulations and fixing (or repealing) Obamacare would all help the economy grow faster, they were all centerpieces of his campaign speeches, and they are unlikely to encounter major Congressional pushback.

So, therein lies the choice: if Trump decides to kick off his presidency by making trade and immigration his main focus, the economy and markets probably struggle. If he instead focuses on his campaign promises designed to boost economic growth, the economy and markets should respond positively.

Until it becomes clear which of these two divergent paths President Trump decides to follow, market volatility will likely remain quite high.  However, it seems reasonable to assume that he’ll focus on the economic portions of his platform early in his presidency to fulfill his promise to middle America and build some positive momentum.  If he does, a Trump presidency may not be as bad as many have assumed, which would suggest that markets will continue performing well for the foreseeable future.