After a long and brutal U.S. Presidential election campaign, Donald Trump has emerged victorious. Equally important, the Republican party retained control of the U.S. Senate while also retaining a comfortable majority in the House of Representatives.
For a large number of Americans and the international community who were anticipating a Clinton victory this was a significant blow. In the wake of their disappointment we saw international stocks, currencies and commodities fall while treasuries rose. Investor reaction was to take a risk off posture and liquidate stocks in a flight to purchasing treasuries. Wise investors won't react so quickly.
First, the U.S. economy that President Trump will inherit is in pretty good shape. Real economic growth has picked up in recent months, the unemployment rate is at 4.9%, S&P 500 earnings have rebounded from the oil and dollar induced slump of 2015 and inflation is still moderate. In addition, the global economy is also showing signs of life with the global manufacturing purchasing managers’ index hitting a two-year high in October. (See the attached article.) All of this, absent political uncertainty, would be positive for stocks and negative for bonds in the long run.
While the election results represented a Republican sweep, actual policy change will be far less dramatic than the campaign rhetoric. As we saw during the campaign “establishment” Republicans are not fond of Trump and the latter may well balk at unfunded tax cuts or spending increases.
Common sense tells us that both the new President and Congress must act slowly on dismantling/changing the Affordable Care Act or trade agreements, until some better alternatives can be found.
But the voters have spoken and the politicians may be willing to go along with some proposals to increase spending, lower taxes, reduce illegal immigration and increase tariffs, all inflationary in their affect. The question that remains is will these strategies create sufficient economic growth resulting in the tax revenue to pay for them. If not, the alternative is additional government debt, an unpleasant prospect given it's recent downward trend.
In the meantime, there will be volatility! But investors would do well to do NOTHING. Stay the course of your investment strategy and hold a well diversified portfolio of high quality global stocks, bonds and alternative investments.
What we have learned is that populism is a good political strategy. Whether it should change your investment strategy? Probably not!