Market Impact of a Trump Presidency

Donald Trump emerged as the winner last night of a hotly contested presidential campaign and will be inaugurated as the 45th president of the United States on Friday, January 20, 2017. The transition to a Republican presidency and Trump’s rejection of politics as usual, which drew so many voters, naturally lead to questions about his impact on the economy and markets. Today on our blog we provide a high level overview of our thoughts of the significance of a Trump presidency.

ECONOMY

Does Trump’s win change LPL’s view on the economy over the remainder of 2016 and into 2017?

The election results have not changed our long-term outlook for the U.S. economy. We will continue to monitor many important economic indicators, including the Five Forecasters, the Current Conditions Index, and the Recession Watch Dashboard, and will keep you updated in the event of any changes to our views.

Will the election results cause a recession?

Elections do not in and of themselves cause recessions. Policies can, however, and we need to wait to see which policies Trump moves forward with and the details of those policies.

Our Recession Watch Dashboard continues to point to an overall low risk of recession within the next year.

What impact might the election have on overseas economies and markets?

Trade has been a major theme in this election, yet a president’s ability to impact trade directly and immediately is somewhat limited. Trump has been outspoken in favor renegotiating NAFTA terms and has been opposed to the TransPacific Partnership (TPP), which has little chance of passing. The Trump victory raises some concern across foreign markets about U.S. trade.

FED

Will the election results impact Fed monetary policy later this year and in 2017?

We do not believe the election results have changed the Fed’s outlook. Furthermore, we believe the Fed is much less sensitive to financial markets than most people think. As it stands, we believe the Fed is on course to increase rates at its December meeting, with another 2-3 increases in 2017. It would take a major market disruption or a change in the economic fundamentals for the Fed to alter this course.

EQUITIES & FIXED INCOME

Will the election result cause a bear market in equities?

Just as an election does not cause a recession, it does not cause a bear (or bull) market. Government policies alone do not change the market’s long-term trend, although they are a factor.

Shorter term, elections are rarely a harbinger for a sell-off, and when they have been, the election has not been the primary cause. In election years since 1952, the S&P 500 has returned an average of 2.5% in November and December and has been higher 75% of the time. From Election Day until Inauguration Day, the S&P 500 has averaged a gain of 1.0% and has been higher 69% of the time. The median return jumps to 3.0% because of a nearly 20% drop in 2008 that skews the average return, but 2008 returns were fundamentally driven by the recession, not Obama’s election. The bottom line is some near-term volatility is likely, but a massive sell-off absent an economic recession has never happened in the period between the election and inauguration.

Are the near-term results impacted by the party of the President?

There doesn’t appear to be much of a difference in equity performance over the short term. Since the election in 1952, the final two months of the year have returned 2.6% when a Republican wins and 2.4% when a Democrat wins. Looking at the largest drops the final two months of an election year in 2000 (Republican victory) and 2008 (Democrat victory) stand out, as the S&P 500 dropped 7.6% and 6.8%, respectively. Both times the economy was either in a recession (2008) or about to fall into a recession (2000) – which greatly contributed to the equity weakness. With the end of the earnings recession, improving consumer confidence, and the best quarterly GDP print in two years – we presently have an improving economic backdrop, which should help contain any large downside moves in equities the rest of 2016.

Which sectors would likely benefit under Trump?

Biotech and Pharmaceuticals: Although Trump has stated his desire to repeal the ACA and has favored drug re-importation from other countries, controlling drug prices is unlikely to be as high of a priority for him as it would have been for Clinton. As a result, biotech and pharmaceutical companies may get a bump. We believe the market may have overreacted to perceived policy risk and we continue to favor the healthcare sector, which has historically performed well after elections.

Energy: Trump is likely to be positive for fossil fuels. He has promised less regulation on drilling, along with expansion of drilling areas. The segment of the industrials sector that services the energy sector may also benefit.

Financials: The Trump administration is likely to be easier on financial regulation than Clinton would have been. Trump has indicated he would like to roll back financial regulations, including the Dodd-Frank legislation enacted as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall, which would separate traditional banking from investment banking, a move we see as very unlikely.

How will the election impact the dollar and bonds?

Dollar: Trump’s policies are likely to be relatively negative for the U.S. dollar. His comments on renegotiating U.S. debt held by foreigners may limit the attractiveness of bonds to foreign investors.

Bonds: We saw an initial Treasury rally as stocks sold off overnight, but yields have since moved higher. We expect there may continue to be additional volatility as markets digest the news, but we broadly believe markets may be pricing in a rise in deficit spending, which is pushing yields higher; though continuation of low rates overseas is an offsetting factor, potentially keeping rates somewhat range bound over the near-term.

Will Trump’s policies lead to a debt downgrade?

Trump had mentioned last spring the possibility of renegotiating our debt and paying back less than the full amount if the economy were to falter. This idea, if implemented, would almost certainly lead to a debt downgrade. However, he backed away from this idea a few days after he floated it.

More realistically, Trump has signaled higher deficit spending. While deficit spending was a contributing factor to the U.S. debt downgrade by S&P in August of 2011, it wasn’t the only reason. The main driver of the downgrade was the debt ceiling crisis, as Republicans demanded a deficit reduction package before they were willing to join Democrats in raising the debt ceiling. Divided government and partisan politics led to months of debate and an eleventh hour deal that avoided a default. With Republicans keeping control of the Senate and the House, a fight over the debt ceiling fight that could threaten the U.S. credit rating is unlikely.

COMMODITIES

What is the election impact on gold?

Gold can thrive in chaotic environments and the uncertainty surrounding Trump’s policies could offer some support to the commodity.

What is election impact on oil?

When discussing oil, it is important to remember that oil stocks and crude oil can have very different performance, even though investors often expect similar returns.

Trump’s victory is likely a positive for oil stocks, especially in the short run. He has promised reduced regulations on oil and gas production, which would improve profitability of existing projects and may result in a very marginal increase in U.S. production. Note, this may be a negative for energy prices.

VOLATILITY

Will volatility increase due to the election outcome?

We expect that market volatility will likely increase. Equity markets have experienced abnormally low volatility recently, in part because of central bank intervention. As those interventions decrease, volatility should increase. However, we view that increase as a healthy aspect of equity markets. The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington.

 

 

 

 

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.

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