U.S. Elections and the Market

Russell Market Update:   NOVEMBER 2016

U.S. elections 2016: Trump wins White House.

Markets react with a selloff

U.S. voters wanted change. They got it. Unless there is a recount surprise, as of now, it appears likely we will have Donald Trump as the next American president.

The result speaks to the erosion of the middle class, especially in key rust belt states. Even with the aggregate economic gains during Obama’s presidency, there was a feeling of dissatisfaction among these segments of the electorate. The election results suggest that Trump was able to tap into this as an agent of change. And Republicans also maintain control of both the House and Senate, meaning that President Trump’s policies could have some margin of support in Congress.

But if the markets are any indication, this really wasn’t the kind of change investors were expecting for the U.S. elections. Many investors appear to be simply choosing to sell now, and likely plan to ask questions later. It is important to be wary of following the herd.  

Global markets initially took the news badly overnight as we saw a sharp U.S. market selloff. But, at 9:30 a.m. Eastern Standard Time, markets were beginning to recover. The Dow Jones Industrial Average was up 0.4% and the S&P^® 500 Index was flat. In other regions, the Nikkei 225 index closed before the rally, down 5.4%.while the FTSE 100 was up 0.1%^. In addition, this is affecting some foreign currencies, such as the Mexican Peso, which was down 10.1% in early trading.

In Canada, the S&P/TSX Composite Index also opened flat and the Canadian dollar was off by just over 1% to about 0.745 cents U.S.

Despite these initial dips, Russell Investments’ strategists believe this is likely a shortterm reaction. Remember the sharp drop and swift recovery that happened with Brexit? As with many geopolitical events that generate volatility, we believe the first priority is to rationally evaluate your chosen investment strategy. Review your primary market indicators (we use cycle, value and sentiment), consult your expert advisors and then chart your course over the long term rather than as a reaction to current events. There could be opportunities you miss. 

Looking at the potential longer-term global ramifications, President Trump may call into question the decades-long assumption that more trade is good trade. The “Brexit” vote this past summer was one shoe dropping on a growing belief that trade may not always be good. The U.S. presidential election is another shoe. Trump has opposed the TransPacific Partnership, said he will re-negotiate or tear up the North American Free Trade Agreement (NAFTA), and has generally shown a willingness to renegotiate trade deals with anyone. 

With 75% of Canadian exports heading to the US, representing roughly 20% of the domestic economy, this trade uncertainty, especially at a time when domestic growth is tepid at best, is a concern. To be clear, we do not anticipate any immediate change in trade-related policy. Instead, the concern would be the influence this uncertainty may infuse into the investment decisions that both domestic and foreign corporations make going forward. These are early days, and more often than not, political rhetoric during the campaign trail is just that, rhetoric. Needless to say, we will continue to monitor and communicate as necessary.

Looking ahead to the medium term

Even though such a drastic change in administrations may seem jarring to some, the American political system has plenty of checks and balances, which is why no president since Franklin D. Roosevelt has been able to enact a truly far-reaching agenda like the New Deal.  

Plus, the U.S. economy is driven far more by the private sector and consumer spending, in particular, which accounts for nearly 70 percent of economic activity. Fundamentals matter more for the outlook: what happens with earnings growth, economic growth, and monetary policy are likely to be much more influential than presidents when it comes to financial markets, in our view. And don’t forget the U.S. Federal Reserve (the Fed), which holds many of the economic levers in the United States, has an important meeting in December where we believe they are likely to modestly hike interest rates. We still think the Fed is on track to hike at that meeting, but it is a much closer call after today’s outcome. Fed Chairwoman Janet Yellen and the Federal Open Market Committee will be looking at financial conditions to see whether markets stabilize before making that important policy decision.

For Canada, the direction of short-term interest rates in the US is expected to influence domestic yields and currency going forward. Ultimately, the Fed’s decisions are likely to have greater influence than political chatter.

So we don’t see this election as having a lasting impact on markets. True, it will take some time for investors to consider the implications of a Trump presidency, and act accordingly. . But there are sectors that might benefit—energy could outperform, given Trump’s insistence that he will reduce regulations and work to boost output of oil, gas and coal. Healthcare and biotech stocks, which faced concerns that Hillary Clinton would seek greater regulation and even price controls, might benefit as well. More fiscal spending could reinvigorate growth and potentially help to boost the infrastructure sector.

The markets during the next presidency

While President Trump comes with plenty of uncertainty, it isn’t clear what many of his policy positions are and what he’ll actually push forward as a legislative agenda, nor is it clear what direction the Fed will take under a Trump presidency. He has said he will replace Yellen, although her current term is through January 2018. The Fed is deliberately positioned to be independent of the political process in Washington. That provides an important source of stability and leadership in the short-run.

Against a backdrop of stable macroeconomic fundamentals, we at Russell Investments like buying significant dips like this one and prefer non-U.S. assets at this time. We encourage investors to remember that however radical this presidential change may seem, the United States is a big place with a large and diverse economy. And, as Brexit proves, populism is becoming a driving force in global politics today. We don’t think one person—even the president—is positioned to help send the markets permanently off the rails. Savvy investors should look for opportunities as the political environment settles.

 

For more information about our capital markets research, please contact us at 1888-509-1792 or by email at canada@ russellinvestments.com. 

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RETAIL—2016-11-07-1875 (EXP-11-2017]