Donald J. Trump, president elect

29 November, 2016

There is a new president south of the border, and it’s not the one most had predicted. The US election is complete, and the American public voted in Donald Trump as their next president. This leads many investors to ask: how does this affect my inves

There is a new president south of the border, and it’s not the one most had predicted. The US election is complete, and the American public voted in Donald Trump as their next president. This leads many investors to ask: how does this affect my investment portfolio?

Similarities to Brexit

Earlier this year, the UK held a referendum to determine whether or not they should leave the European Union. Surprising to many, the vote resulted with a majority of voters electing to leave the EU. Markets panicked, with large selloffs in many global stock markets following the next day.

Despite the nature of these two events being quite different, the ‘Brexit’ situation was very similar to the US election results in several ways. The first is that both events had been covered ad nauseam in the media, inundating many news feeds/channels with endless opinion pieces and predictions. The second was that the vast majority of those who tried to predict the outcome were wrong, as the UK voted to leave the European Union and Trump won the US election, despite predictions by most to the contrary. The third is that these far-reaching events would undoubtedly have some effects on the global marketplace.

When we emailed our clients in the aftermath of Brexit, our message was simple: don’t succumb to the panic you’re currently seeing in the stock markets, as this price movement is one driven primarily by emotion and misunderstanding rather than the traditional fundamentals that should drive stocks prices. Our position on the market movement being a severe overreaction was that, despite the gravity of this event, Brexit wasn’t going to have the kind of lasting impact on the stock markets that investors seemed to be pricing in. The sell-off subsided quickly after about two days, and most markets recovered much of what they had lost by end of the week.

Now, the initial market reaction was only slightly different after Trump got elected than it was when the UK left the European Union. As voting numbers rolled in and Trump took a commanding lead during the night of the election, markets began to exhibit similar panic as the after-hours markets in the US dipped down almost 5%. As markets were pricing in what seemed like the most likely outcome of Trump winning the election, something funny happened: the markets in the US calmed by morning and the S&P500 was actually up around 1% by the end of the following day. The panicked market reaction to a surprise outcome was similar, but the stock markets shed and regained that value in even less time than it took for the markets to close at 4:30pm EST and open again in the morning. It should also be noted that many pundits had predicted a huge and lasting stock market decline if Trump actually managed to get elected. They got it wrong, again.

So how is it that events even of this magnitude often seem to result in little more than a week’s worth of volatility?

Our Media Paints a Dramatic Picture

The media coverage that surrounds these events usually increases the market volatility that follows. The kind of exposure both Brexit and the US election received leading up was enhanced by social media coverage as well as the viral nature of the internet. Social media and the internet are not new to this election, but their role has continued to increase over the years.  This doesn’t really change the reality of what is going on underneath, but it certainly changes the perception, and it also creates a higher level of sensitivity in the markets. It causes more panic.

This type of coverage tends to narrow our focus on the big picture so much so that we forget how big the picture is in the first place. The reality is that our global stock markets and the underlying economies don’t turn on a dime, and few singular events have the ability to re-shape the landscape that quickly or that seriously. Trump isn’t even president yet. Will Trump’s election affect the US economy? Will stock prices at some point begin reflecting the direct impact that results from his policy decisions? Of course. But it won’t happen overnight.

Silver Linings of a Trump Presidency

Today, let’s set aside any moral or ethical dilemmas regarding a Trump presidency. Politics is often a contentious subject, and even though this was an American election, it has become an extremely divisive and heated topic for many of us in Canada as well. This discussion is not centered around whether or not Trump is a decent human being, or whether or not we agree with his views in any way; we are here to discuss how his approach to policy might shape the investing landscape in the future.

Trump is pro fossil fuels. He has talked openly about reviving the coal industry in the US, and he also supports the Keystone XL pipeline, whereas both Clinton and Obama opposed it. He wants US energy independence and sees Keystone as the best way to accomplish this. This is also the one pipeline in Canada that our Prime Minister, Justin Trudeau, supports. If an agreement is reached to begin construction on this pipeline, this will benefit the oil and gas industries in both Canada and the US.

Trump is pro business. Trump plans to cut the corporate tax rate from 35% to 15%. This will increase profits for American businesses, and, Trump’s hope, is that it will incentivize American companies to bring some of their business operations back from overseas and keep existing American businesses from making the move in the first place. What you own in your investment portfolio is companies, and this tax cut should be good for the success of those companies.

Trump has also stated that he plans to use massive deficit spending on infrastructure projects. This should provide new jobs and help boost the GDP at the expense of increasing national debt at a quicker pace.

Keep in mind that many of Trump’s outlandish policy proposals, such as building a gigantic wall along the US/Mexican border or deporting 12 million Mexican immigrants, are extremely unlikely to become reality. Despite running as a republican, Trump appears to have few friends within his own party, as shown by a number of republicans currently holding office that have spoken out against him and his policies at one time or another during Trump’s campaign. Though the house, the senate, and the presidency are all under republican control, Trump may not find it easy to get his policies through congress.

There are many concerns that stem from a Trump Presidency, but that doesn’t mean that it’s all bad news for your investment portfolio.

A Balanced Approach

We have direct and recent examples of those who tried to predict both the outcomes and the market reaction to those outcomes and got it wrong…often. This is also a good reason not to position your portfolio for any individual outcome, but to position such that either outcome produces favorable or at least acceptable results.

New opportunities and new risks will be found as a result of the change in leadership down south, but a balanced approached is what will allow investors to continue growing their portfolios regardless of what happens.

A calm and measured response is usually the prudent approach.