What will markets do with Mr Trump as President?

Nov 23 2016 by Vogue Financial

Prior to the election there were numerous opinions written, including one that we wrote here about the Trump effect on a loaf of bread. All these opinions had differing points of view and differing outcomes, from disaster to stimulus.

 

What some economists said prior to the election

If we read the opinion of economists, and indeed numerous political pundits they all got it wrong. Yes there was a drop of up to 5% but the markets have since steadied and there has not been the predicted armageddon.

Simon Sloan former Chief Economist of the IMF said:

“Investors in the stock market currently regard a Trump presidency as a relatively low-probability development. But, while the precise consequences of bad policies are always hard to predict, if investors are wrong and Trump wins, we should expect a big markdown in expected future earnings for a wide range of stocks – and a likely crash in the broader market.”

Other economists predicted falls of up to 10%.

 

The initial reaction to Trump’s win was absolutely negative

Once it became clear that Trump had a chance of winning the dow futures fell nearly 800 points, but that was short lived. On the Wednesday the Dow closed 256 points up, just 40 points off its all time high, and has continued to climb since the election result.

As mentioned in our previous blogs, markets do not like instability. It may well have been the ructions caused by the new FBI investigation and the simple up and down of the entire election process that made investors jittery. What we have seen since there has been a clear result is markets calming, and indeed climbing.

How markets will react in the long term will depend on how and if some of Trumps more difficult policies are enacted.

The difficulty is that many pundits are predicting a re-evaluation of markets, low interest rates have lead to over valuation of assets. Even Mr Trump has put his views on record with an interview on “Good Morning America” in January of this year. He said:

“We’re in a bubble, and, frankly, if there’s going to be a bubble popping, I hope they pop before I become president because I don’t want to inherit all this stuff. I’d rather it be the day before rather than the day after, I will tell you that.”

As for what some of the more informed businesses have been saying since the election, Citi’s group of analysts, led by Tina Fordham was quoted as saying:

“Trump has no experience in government, and his tenure as President will likely be marked with unconventional, and potentially erratic, policymaking that departs substantially from the political modus operandi of the past, whether Republican or Democrat.

This expectation of change was a major driver of his popular appeal, but it is likely to unsettle markets… A Republican sweep of the White House and both chambers of Congress raises the risk that Trump will find support to pursue his more ambitious campaign agenda items such as invoking a trade war that may weaken US net exports and reduce business investment. This is our near-term recession risk scenario, that likely would either keep the Fed on hold indefinitely, or even prompt interest rate cuts to offset the recession-related damage to the US and global economies.”

These sentiments have been echoed by many other analysts but then they also point out that Mr Trump’s bluster may not ever eventuate into change as he alone cannot make sweeping policy changes.

 

The question that we should be asking is ultimately – why does it matter?

Investing should be about strategies, value and long term. Presidents come and go, your investment strategy should stay with its sound basis.

As part of your financial plan you may be a passive investor with low cost indexation ETF’s as part of your portfolio. With a planned asset allocation should it make any difference to your investment outlook? If you are an active investor that buys stocks that are undervalued should you change your stance?

It would seem that at this stage they have all been wrong. That is not to say that the markets will not react to policies and/or antics of the President elect but sound investing, with good financial planning, should not be predicated on what might happen – it should be based on a solid strategy and on real facts.

More the point we should be looking at factors such as how low interest rates are affecting asset valuations, and what will happen when the Fed start to raise rates.

We should be concentrating on how policy will affect valuations and how the last 8 years of growth may come to a stop sometime in the not too distant future.

 

An interesting fact to leave you with:

The SP & P 500 was down 5% the day after President Obama was elected, but then rose 14.9% over the next 12 months.

 

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