In case you missed it on Wednesday from CI, here are our thoughts on Donald Trump's victory.
The following piece was written by myself and Bob Swanson, Principal & Chief Market Strategist.
In a year full of surprises, including the Brexit vote and World Series victory of the Chicago Cubs, we can now add a Donald Trump presidential win to the list. The election outcome has come as a surprise to the market, as all of the polls suggested Hillary Clinton had a comfortable lead. Many investors have been using the Brexit experience as a playbook. The markets, however, were positioned more defensively heading into Brexit, but since this summer have been rotating from defensive to more cyclically exposed companies and industries, as evidenced by the rally in commodities and emerging markets. The knee-jerk reaction experienced by markets last night should not be extrapolated into future market movements, as much of this represents unwinding of positions taken in expectation of a Clinton win. However, volatility may persist for some time as investors rebalance back to a more defensive stance. While it is difficult to contemplate the intermediate to long-term impact of a Trump presidency, there are some suggested market implications based on his campaign comments:
- A reduction in taxes. This would be generally favourable for both corporations and higher income earners and, in theory, should encourage increased spending and investment. Further, making U.S. corporate tax rates more competitive with those abroad should stem the tide of corporate tax inversions and may lead to the repatriation and reinvestment of cash that is currently locked up abroad.
- Less regulation and smaller government should support business development. Sectors that have been the focal point of greater regulation in the Clinton campaign include the health care and financial sectors. These two sectors were among the weakest heading into the election, and may now experience some mean reversal in relative performance.
- A movement from globalization to protectionism suggests a potential decline in global trade and, perhaps, the introduction of trade wars. Multinational firms, and those domestic firms relying on the distribution of imported goods, appear most at risk. Auto and other companies doing business in Mexico may be forced to adjust their business models, should trade barriers or tariffs be enacted. This also impacts the transportation sectors.
- Support of the defence industry seems likely given Trump’s commentary, and would be consistent with a more protectionist stance.
- Fiscal stimulus was a promise of both candidates. This should benefit firms in infrastructure-related industries. Higher government expenditures will also put increasing pressure on budget deficits and may result in a paradox of both higher interest rates and a lower dollar.
- A Trump win was expected to be negative for the U.S. dollar. This may help to support commodity prices, unless the concern over the decline in global trade takes on greater relevance.
Given the current lack of bipartisan support for Trump, it will likely be a difficult and lengthy effort to implement his policy agenda. This is why we caution about drawing too many conclusions from last night’s results. The government remains divided and the odds remain high that gridlock in Washington will continue.
The Cambridge portfolios have carried higher than normal cash levels throughout the year. This was not a reaction to Brexit or election outcomes, but was due instead to elevated valuations and lack of attractive investment opportunities. We have a target list of companies with pre-designated prices/valuations that we would like to add to the portfolios if presented the opportunity. The increased uncertainty brought about by Trump’s victory will likely provide more attractive entry points for our target companies.
Historically, the market performs well between election and inauguration date. The outcome of this election may not inspire unity, so the past may not serve as the guide this year. From an intermediate perspective, the first and second years of the presidential cycle are typically weaker than the third and fourth years, as the sobering reality that campaign promises typically go undelivered sets in.
In summary, uncertainty and corresponding volatility should present an opportunity for us to deploy some of our cash balances. We are also aware that any policy changes will likely be a long, drawn-out process, so we will not likely make structural shifts in our portfolios. As always, we focus on individual companies that can navigate the changing political and economic environment within which they operate.