World financial markets swung wildly yesterday afternoon as Donald Trump stunned the world and headed for victory over Hillary Clinton to secure the top job at the White House.
A gracious tone in the first speech by US President elect Trump had a calming effect on the markets, and there was a surprisingly fast recovery following initial sell-offs.
Trump sounded more Presidential than at any stage during the long winded US election campaign:
- Trump congratulated his Democratic rival, saying that Hillary Clinton waged “a very very hard-fought campaign”. He also commended her for having “worked very long and very hard” over her political career.
- “Now it’s time for America to bind the wounds of division – to get together,” he said. “To all Republicans and Democrats and independents across this nation, I say it is time for us to come together as one united people”.
- Trump, who had been criticised by opponents for rhetoric characterised as divisive and racist, pledged, “I will be president for all Americans, and this is so important to me”.
The Australian sharemarket initially dropped by almost 4% but recovered to end up down 1.94% at close of trade. The US dollar and European markets also recovered from early dips as markets continued to digest Trump’s victory for the Republicans including winning control of the House and Senate.
The Trump result eerily emulated the ‘Brexit’ experience in Britain earlier this year. There was a sense of complacency, surprise and panic, followed by swift recovery. In fact, it has happened more quickly this time.
However, it is yet to be seen whether Trump will be a much better President than some people were expecting less than 24 hours ago, and if there are enough positives from the result including the absence of a congressional deadlock. Markets around the world will be looking for Trump’s actions to reflect the words in his victory speech, with less of the maverick behaviour that he portrayed throughout the campaign.
Will Trump’s policies get traction?
Trump’s policy platform lacks the cohesion of a “typical” Presidential candidate reflecting his relative isolation from the Republican Party. This is further exacerbated by the fact that he has also been both a registered Democrat and Republican voter in the past.
There have also been some major shifts in policy during the campaign which makes it difficult to determine his core beliefs, although these shifts have largely been around immigration, social policies and foreign affairs.
Trump’s major economic policies include:
- Lowering the corporate tax rate to 15% from 35%, and eliminating loopholes and deductions.
- Cutting the top personal income tax rate to 33% from 39.6% and simplifying personal income tax by collapsing the current seven tax brackets to three.
- Repealing estate tax laws.
- Repealing or renegotiating trade deals including the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States, and the Trans-pacific Partnership.
- Increasing tariffs on exports to the US (and leaving the World Trade Organisation if it rejects the proposal).
- Replacing the Affordable Care Act (Obamacare) with a more market-based health insurance system.
Congressional support for many of Trump’s policies may be difficult to achieve once he is in the White House
Some uncertainty remains:
- The Mexican Peso has fallen almost 12% hitting at a record low. This is not so much reflecting Trump’s threat to “build a wall” along the border between Mexico and the US, but rather his intention to slap a tariff of 35 per cent on Mexico’s exports to the US.
- Trump’s promise to launch a trade war against China, by declaring it a “currency manipulator”. He’s also threatened to impose tariffs of up to 45 per cent on everything China exports to the United States, something he can do under existing legislation.
- Trump’s fiscal policies will add significantly to the US budget deficit and US public debt, potentially leading to higher long term US interest rates (which would in turn be negative for stock prices).
- Trump’s repeated personal attacks on US Federal Reserve Chair Janet Yellen and the call to “audit the Fed” threaten to undermine market confidence in the Federal Reserve. President Trump will have the ability, almost immediately upon taking office, to reshape the Fed by filling the two vacancies on the Federal Reserve Board. Previously replacements for the board have been blocked by the Republican-controlled Senate in the outgoing Congress.
Reasons that markets are not likely to have a complete meltdown:
- The US economy is in reasonably good shape, with unemployment still low and growth rising in the last quarter.
- Real economic growth has picked up in recent months while the unemployment rate, at 4.9%, is close to any economist’s definition of full employment.
- S&P500 earnings have rebounded smartly from the oil & dollar induced slump of 2015 and inflation is still moderate.
- The global economy is also showing signs of life with the global manufacturing PMI index hitting a two year high in October. All of this, absent political uncertainty, would be positive for stocks and negative for bonds.
What does this mean for your investments?
While ongoing uncertainty associated with the Trump presidency is likely to put a hand brake on equities markets, there is a concern that if passed, the combination of tax cuts and trade policies would see US budget deficits increase and the economy hurt by retaliatory trade actions.
In the short-term, the US Federal Reserve is likely to delay interest rate increases including the potential December hike, in response to the renewed uncertainty. However, in the longer term, deterioration in the deficit and higher inflation would likely see bond yields rise.
Your Integrated Financial Solutions investment portfolios reduce risk by utilising market leading research to identify high quality stocks that are diversifying across asset classes, regions and sectors in line with your risk profile.
To maximise your long returns, your portfolio is designed to deal with short term equities volatility that comes with geopolitical and other risks such as a the Trump Presidency result. This removes the need for panic sell-downs and mis-timed portfolio changes after markets have already fallen, crystalising losses. A well-diversified mix of highly researched, quality companies and stocks will benefit from market bounce backs that follow sharp declines over time.
Please contact our office if you would like to discuss your current investments or to take advantage of buying opportunities that arise.