Market Update, Economic Outlook

What impact will Trump's victory have?

November 09, 2016

Markets dislike uncertainty, and the Trump victory may well lead to a Brexit-like selloff in the S&P 500. Similar to Brexit, however, the selloff may be short-lived depending on Trump’s post campaign messaging and the degree to which Congress is viewed as a countervailing balance against extreme change. After a bitterly divisive campaign, Trump has few friends in Congress and continued gridlock would not be surprising.

Trump’s campaign rhetoric was light on detail, but we do know that he wants to lower tax rates and he will look at renegotiating trade terms. As President, he does have the power to impose tariffs and quotas and declare nations to be currency manipulators. Trade, however, is a two way street, and we expect that when Trump is confronted by a strong trade lobby that benefits from current trade terms he will back down dramatically on protectionist vitriol. Additionally, since trade terms are often written into law, the approval of Congress may be needed to effect major changes to agreements.

With regard to currency manipulation, the facts do not support Trump’s contention that China is deliberately pursuing a weak yuan policy. In fact, it appears that China has done substantial intervention recently to strengthen the yuan to offset ongoing capital flight. Given the deflationary impact of a strong dollar, as time goes on we expect Trump will suddenly find weaker import prices politically expedient.

It appears that Trump is sympathetic to the domestic fossil fuels industry, suggesting a more regulation-lite environment for U.S. based producers of coal, oil and gas. He may also target Chinese dumping of steel and aluminum as examples of unfair trade practices that need to be fixed.

Both Trump and a substantial number of Republicans would like to repeal or substantially modify the Patient Protection and Affordable Care Act. However, certain provisions of “Obama Care”, such as mandatory coverage for pre-existing conditions and coverage for children through age 26 on their parents’ policy, are widely popular and will need to be addressed to accomplish reform. Pressure to lower drug prices might diminish if Trump emphasizes competition as the best mechanism for price efficiency.

Trump and Congress seem supportive of proposals to increase infrastructure spending that could translate to better GDP growth rates as spending gets underway. However, Trump has shown no sensitivity to the issue of an expanding deficit which will effectively constrain any proposal to cut taxes or spend money. Given the fiscally conservative bent of Republicans in Congress, we expect that spending initiatives, if not tax cuts, will encounter stiff resistance from a Congress worried about a ballooning federal debt.

After the emotional selling-on-the news abates, and details on policy proposals emerge, we expect investors will refocus on earnings and that U.S. stocks will continue to be a compelling alternative for investors who can withstand normal stock market volatility. History has shown that the timing of major world events and conditions is much more impactful on stock market returns than the outcome of Presidential elections. Very shortly, the focus will change to the mid-term elections in 2018 and that will be a referendum on Trump’s first two years in office. Hopefully Trump will be good for corporate America, and the stock market will continue to advance on economic growth and strong earnings supported by a relatively stable world order.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable but its accuracy is not guaranteed. Investing entails risk, including the possible loss of principal. Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Emerging markets can have less market structure, depth, and regulatory oversight and greater political, social, and economic instability than developed markets. Fixed Income investments, including floating rate bonds, involve risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. Interest rate risk is the risk that interest rates will rise, causing bond prices to fall. Past performance does not guarantee future results. The information we provide does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Please consult with a financial counselor, attorney or tax professional regarding your specific investment, legal or tax situation.

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Any views or opinions expressed are those of Washington Trust Wealth Management. The information provided does not constitute legal, tax, or investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. Please consult with a financial counselor, attorney, or tax professional regarding your specific investment, legal, or tax situation. It should not be considered a solicitation to buy or an offer to provide investment advisory or other services. All information is current as of the date of this material and may change at any time without prior notice. The information provided is solely for informational purposes and has been obtained from sources believed to be reliable but its accuracy is not guaranteed.