The New York businessman defied pollsters and bookmakers to win the US presidency, but markets have largely taken the news in their stride.
2016 may yet go down as the year that the old political playbooks became redundant. The Brexit vote embarrassed the pundits, but Donald Trump’s election to the US presidency came as a similar surprise.
The businessman and TV celebrity was known to have star power, but he had never held political office, had made comments that apparently alienated large swathes of the electorate, and could appear petulant and unpredictable. He faced one of the most experienced presidential candidates in history, one who benefited from huge institutional, financial and media support. The polls and the bookies were united in their view that Hillary Clinton would win.
Yet they were wrong. Having secured the most primary votes in the history of the Republican Party, Donald Trump went on to beat Clinton to the presidency by a comfortable margin, taking (at latest count) 279 Electoral College seats to Clinton’s 218, although they took an almost identical portion of the popular vote. The Republican Party also took majorities in the Senate and House of Representatives, giving it a clean sweep of Congress and the White House.
Initial market responses were sharp, but did not persist. Only Asian markets were open as the momentum towards Trump became clear, and the Nikkei 225 dropped almost 6% in a day. At one stage, the Mexican peso slipped by more than 10% against the dollar, presumably due to Trump’s trade tariff pledges. The dollar fell close to 2% versus the euro, and more against the yen, while gold rallied, indicating a flight to safety.
Yet many of the forecasts of market turmoil proved ill-founded. Although yields on 10-year US Treasuries slipped after the result, the trend was soon reversed. At opening, the FTSE 100 experienced the briefest of falls before returning close to its opening price. The S&P 500 was relatively calm in early trading.
“Given the relatively muted response from markets thus far, perhaps investors have learnt that there is no need to panic,” said Ajay Krishnan of Wasatch Advisors. “It was wrong to overreact to the Brexit vote and, in my opinion, it would be wrong to overreact today.”
Some of the relief rally may have been in response to Donald Trump’s acceptance speech. Eschewing the pugnacious rhetoric of the campaign trail, Trump instead turned peacemaker, offering a welcome call to unity. Ordinarily, this would come as no surprise but, given the tenor of the campaign, it helped to quell some of the deeper fears on markets.
“It’s time for America to bind the wounds of division; we have to get together,” he said. “To all Republicans and Democrats and Independents across the nation, I say it is time for us to come together as one united people. I pledge…that I will be president for all Americans…For those who have chosen not to support me in the past…I’m reaching out to you for your guidance and your help so that we can work together and unify our great country.”
Words are one of a president’s most important tools, and markets were relieved at the shift in rhetoric from the US’s new president-elect. Nevertheless, the election of Donald Trump brings with it a significant rise in political risk, not least because Clinton was seen as the continuity candidate. Trump has been criticised during campaign season for his unpredictability and policy reversals. (He scores badly on Politifact, which tracks and assesses politicians’ consistency and promise-keeping.) He has also espoused several radical policy positions, and been vague on others. Much remains unclear.
For this reason, it is useful to remain alert to how US politics has influenced markets in the past. Markets have fallen in the wake of presidential elections before. Indeed, they did so after the elections of Franklin D Roosevelt in 1932 and Barack Obama in 2008. Yet both presidents oversaw bull markets during their respective presidencies – indeed, during the latter’s presidency, the S&P 500 has risen around threefold. Signs of causal links between political shifts and sustained market trends are disputed at best, and usually rejected outright – in recent years, central banks appear to have played a much more influential role.
Yet if politics does not drive markets, can it shape the economic outlook? Markets undoubtedly care about the broader economy; its constituent companies operate in a business climate that is highly sensitive to the economic outlook. Yet studies of the history of economic growth in the US suggest that it is not contingent on government policy, and does not show marked linkages to a particular party (see chart).
“Overall, I expect the momentum in the US economy to continue,” says Neil Woodford of Woodford Investment Management. “I expect modest growth in 2017, relatively muted inflation and, with the prospect of a slightly more stimulative fiscal policy and the absence of rate hikes, I don’t think a Trump presidency foreshadows a US recession.”
Given the limited impact of presidential candidates on both economic growth and financial markets, it is crucial that long-term investors are able to remain focused on their investment objectives. Short-term market moves often follow hard on the heels of political events, but these tend to be driven largely by fear or greed, rather than by careful analysis.
Instead, experienced fund managers know that, while they cannot afford to ignore politics, it should not become the driver of their decisions. The balance sheet and business outlook of the individual companies they invest in are far more important. Once those details are worked out, they may then be able to take advantage of the kind of market distortions that politics provides.
“Our portfolio is focused on business fundamentals and is therefore not particularly exposed to either candidate winning or losing,” said Sunil Thakor of Sands Capital in the week leading up to the election. “In many senses we will be in the position of awaiting the market reaction versus trying to predict it. Whatever the outcome, it is unlikely that it will drive any immediate changes to our portfolios.”
Donald Trump will not be inaugurated until January 20, leaving 10 weeks until the handover. That waiting time may yet prove important, as the Trump team prepares itself for the realities of office, and as markets have the chance to settle in the run-up to Christmas.
In December, the Federal Reserve will meet to make its next decision on interest rates. At its press conference last week, Janet Yellen indicated that a rate rise might be likely in December. Yet at that time Hillary Clinton was favourite for the presidency. Donald Trump has attacked Yellen’s Fed during campaign season and, despite a semi-retraction, his attitude to the Fed remains unclear.
At any rate, if the Fed believes the market or economic outlook has shifted in the wake of the election result, then it may prefer to leave rates on hold, rather than risk only the second rate rise in nine years. The chances of a December rate rise have dropped from over 80% to under 50% since the election (source: Bloomberg). A decision to stick would offer a boost to markets, not least in Asia. There are also questions over whether she will choose to remain in post, in light of Trump’s public attacks.
“It’s very difficult for Trump [to replace Yellen] but he could make her life difficult,” said Megan Greene of Manulife Asset Management. “It is likely she will stick it out until her terms ends [in 2018], but if she does go earlier, there will be significant implications.”
Either way, markets remain focused on a range of issues. Protectionist measures offer a potential headwind, while fiscal stimulus and energy deregulation could support markets. The impact on individual sectors will vary. Unlike Clinton, he has not promised to crack down on high drug prices, and a number of pharmaceutical stocks have already rallied as a result, among them GlaxoSmithKline, AstraZeneca and Novartis.
“Trump’s victory doesn’t change the fundamental assumptions that I have incorporated into my investment strategy,” said Neil Woodford of Woodford Investment Managers. “Our significant weighting towards the health care industry has weighed on performance for much of the year, as the market has fretted about the possibility of a Clinton presidency. Now the outcome is known, the prospect of drug pricing legislation is off the agenda.”
There is every chance that politics will cause severe market fluctuations in the weeks and months ahead. Individual investors should heed the wisdom of professional fund managers, who are well aware of the pitfalls investors fall into when they allow their decisions to be dictated by short-term fluctuations, and know the value of sitting them out. Moreover, they have the experience and expertise to use short-term dips in the market to increase their holdings in companies they know well – and believe in.
As with the Brexit vote, some of the old political certainties appear to have been washed away. The election of Donald Trump is the latest, albeit perhaps most important, instance of anti-establishment nativism sweeping across Western countries. It remains too early to know how it will play out, and in recent months, investors have learnt not to pay too much attention to the bookies. But economic and financial gravity remains in place, and markets appear to have weathered the news.
Indeed, they have done so far more easily than the news that the UK had voted to leave the EU. Perhaps a few more investors have learnt the cost of panic.
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