Edward J. Perkin, Chief Equity Investment Officer, Eaton Vance, says:
Yesterday, the American electorate followed the lead of their British bretheren by playing their populist “Trump” card. The playbook of Brexit is instructive. Uncertainty ahead of the vote led to volatility. The reality of the outcome led to a sharp selloff. If the playbook holds, the right thing for investors to do is to look through the near-term noise for opportunities. As it turns out, US futures have retraced half of their initial fall as of this writing.
It is worth remembering that the US system of government restricts the powers of the presidency and that new legislation originates in Congress. That said, President-elect Trump clearly has a mandate to restrict immigration and renegotiate trade agreements. Beyond those two issues, the agenda is likely to be driven by the Republican House of Representatives and will include significantly reduced corporate tax rates, cash repatriation, and an infrastructure package. Setting aside the likely near-term uncertainty, this is not too different from what would have happened under a Clinton Presidency.
In these moments, it is important not to overreact, and to take a long-term view. Potential winners include healthcare and capital goods companies as well as domestic-facing companies with high tax rates and foreign competitors.
A few more thoughts…..
US markets have opened flat. Lots of sector divergence with Healthcare +2.5% (fears of political pressure on drug pricing go away; possible rewriting of the Affordable Care Act), Financials +2% (steeper yield curve, less regulatory pressure), and REITs and Utilities both -3% (10-year treasury rates are pushing toward 2%). Infrastructure stocks are also doing very well.
Lots of cross currents to think through. For example, should investors favor multi-nationals or domestic companies? Multi-nationals have the overseas trapped cash that would benefit from repatriation, but domestic companies have higher tax rates, which would benefit from corporate tax cuts, and would be relatively immune if a trade war were to begin.
The overall resilience of the market seems to be a function of Trump’s conciliatory victory speech, a recognition that certain sectors will benefit from less political pressure, and the focus on the likely pro-growth elements of his proposals, particularly tax reform. Also, investor sentiment is poor and cash levels are high so there are plenty of buyers out there.
Eric Stein, Vice President, Co-Director of Global Income Group, and Portfolio Manager at Eaton Vance, says:
If 2016 has taught us anything, it’s that anything can happen.
The Chicago Cubs overcame a 3-1 deficit to win their First World series in 108 years. In the NBA, Cleveland Cavaliers also staged a stunning 3-1 comeback against the seemingly invincible Golden State Warriors. And in the political arena, Brexit shocked and unnerved investors.
Continuing that streak of surprises, Donald Trump will be the 45th U.S. president. In a night eerily similar to the Brexit vote when financial markets, exit polls and most pundits got that outcome dead wrong, Trump secured an unexpected victory. In Congress, the Republicans kept their majorities in the House and Senate.
So what now for investors?
The initial overnight reaction in U.S. stock futures was negative, although the major indices flipped positive in early trading Wednesday after Trump’s conciliatory acceptance speech. Meanwhile, U.S. Treasury yields were higher with a steeper curve, and the dollar was little changed versus most of its currency rivals.
The main takeaway of a Trump presidency is the distribution of expected outcomes has widened dramatically. This election has been an incredibly polarizing event with two main party candidates who were essentially at record disapproval ratings. However, it’s important for investors to put their emotions aside and dispassionately analyze potential policy outcomes now that the result has been decided.
That means closely watching the tone and rhetoric from Trump. If he focuses on building walls, banning certain people from the U.S. and throwing Clinton in jail, that would have ominous consequences for the markets.
On the other hand, markets would be reassured if Trump focuses on pro-growth tax and regulatory initiatives. In his acceptance speech, Trump said he would “harness the creative talents of our people and … call upon the best and brightest to leverage their tremendous talent for the benefit of all.” He also pledged that his economic plan would double U.S. growth.
My expectation was that a Clinton victory would mean more of the slow growth that has characterized the recovery after the financial crisis. With Trump winning, the “tails” on both sides have increased.
If Trump calls for tariffs and ripping up trade agreements, that means a bigger chance of recession. If, however, he focuses on pro-growth tax and regulatory policies, and infrastructure investment, then there is a chance that U.S. economic growth could exceed 2% or even 3%.
Bottom line:
Trump’s victory means more uncertainty and volatility for markets, and a wider distribution of potential outcomes to consider from both a market and economic perspective. I do expect to see the market continue to price in a significant fiscal expansion and also higher inflationary outcomes. In the coming weeks, the president-elect’s tone and rhetoric could provide clues on where his administration will focus from a policy perspective. Given the wider distribution of economic outcomes, there is the potential for significant market reaction in both directions.
