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The Impact of the U.S. Election - Concluding Remarks
November 16, 2016
The outcome of the U.S. presidential election came as a surprise to just about every analyst, pollster, and political “expert.” But in many ways it should not have been a total surprise—as demonstrated by Brexit and emerging political movements in Europe, it is becoming clear that citizens in developed countries are increasingly viewing globalization as a threat to domestic interests, particularly jobs and security.
Though unemployment is near historic lows here in the U.S., GDP and wage growth have been notably weak, and the government has so far failed to adequately explain how trade and globalization has provided—or will provide—any near or long-term economic benefit. President-elect Donald Trump successfully tapped into the unrest of those who have been displaced by expanded global trade, particularly in former U.S. manufacturing hubs.
As investors, it is important to transcend politics when making investment decisions. Whatever one’s political views, remember that it’s not about the candidate—it’s about policy. The outlook for the U.S. economy is dependent upon what policy changes occur, so we will be watching closely and incorporating new policy assumptions as the dust settles and the transition occurs early next year. It is also important to maintain the ‘30,000 foot’ view that governing is much more difficult than campaigning, and policy soundbites that may enliven voters on the campaign trail are often not pragmatic (or even possible) once subjected to the crucible of Congress’s legislative process. Policies tend to get watered down before becoming enacted.
That being said, Republicans now control the White House, Senate, and the House of Representatives, thus giving them the mandate and the structure to legislate. We expect significant policy changes going forward, but we also believe it makes most sense to remain patient and watch closely as policy measures are set forth, negotiated, and implemented.
Below are a few of our initial insights based on President-elect Trump’s proposals and some of the big ideas from the campaign:
Financials – Interest rates have already been on the rise, and the prospect of even higher rates and less regulation has spurred the recent rally in Financials. Republicans will not likely be able to repeal Dodd-Frank, but they could certainly make changes at the margin and water-down regulations coming into place. Changes will likely include modifications to the structure of the Consumer Financial Protection Bureau, end user derivative rules, and lifting the SIFI designation for regional banks.
Technology – We still see value in large technology, as we believe these companies have compelling growth prospects no matter what the policy environment. Our initial analysis is that emerging segments like cloud computing should not be hamstrung, and industry leaders should continue to perform well.
Healthcare – Hillary Clinton was a perceived threat to healthcare based on her campaign rhetoric on drug pricing, but that risk has faded with Trump’s election and a Republican-controlled Congress. Obamacare may be a different story, as Trump is likely to eliminate and/or change some parts of the law.
Industrials – Industrials rallied in the days following the election, as the market anticipated that large infrastructure projects would be a top priority for Trump’s administration.
Energy – Trump has made it clear that he intends to promote domestic energy production and rollback the Obama administration’s aggressive stance toward fossil fuels. Most importantly, however, the 20+ stalled pipeline infrastructure projects could be restarted almost immediately. The near-term macroeconomic effects are likely to be positive, with increased output of oil and gas, higher employment in related industries, higher exports of refined products and, possibly, crude oil. However, we still see supply and demand issues in the sector, and favor large cap integrateds.
The Fed – President-elect Trump cannot remove Chairwoman Yellen or Vice Chair Fischer, but it is unlikely he will reappoint Chairwoman Yellen for a second term. Chairwoman Yellen’s four-year term ends in 2018 and so does Fischer’s term. We still see a path to ‘normalization’ of interest rates, with hikes likely over the next year. On a positive note, President-elect Trump’s fiscal spending plans should boost government spending and thus make the Fed’s job somewhat easier in the short- and medium-term; monetary policy would no longer be the only game in town to help fix the U.S. economy.
Fiscal Policy - the tax cuts and spending increases that Trump will likely pursue should boost near-term growth, inflation, interest rates, and the dollar. This assumes that we avoid large increases in tariffs and any related trade war, which is a sizable uncertainty. Still, the view is that taxes are going down and spending is going up, both of which should be stimulative once enacted and implemented. However, given the proximity to full employment, this suggests higher rates and higher inflation. Lowering of the corporate tax rate would also be designed to encourage (if not force) corporations to repatriate profits and pay taxes, thereby generating revenues for the government.
Trade – Sizable tariff increases would effectively fall on domestic consumers and businesses, amounting to a tax increase. This would add to inflation, disrupt supply chains, and generally reduce profits for global firms impacted by any new tariff regime. From a macroeconomic perspective, this may be the biggest risk to assess going forward.
Immigration – the macroeconomic effect of mass deportation is negative, and would largely be disruptive to businesses of all capitalizations. That said, Trump has seemed to soften his stance on deporting all 11 million aliens, instead vowing first to focus on the subset with criminal records (less than one third of illegals).
The graphic below also provides a good briefing of President Obama’s policies that are at stake, versus the changes sought by President-elect Trump. Please note, neither the above briefings nor the chart below are meant to be comprehensive summaries of what to expect going forward—they are merely overviews based on what we know today.
Source: Mehlman Castagnetti Rosen & Thomas
In the days following the election we observed a fairly dramatic sector/asset class rotation, which reflects a renewed expectation for higher inflation and a more normalized rate cycle. Cash has been coming out of bonds, gold, and the large technology leaders and going into Financials, Industrials, Materials, and Healthcare. These are just short-term moves, however, and are not necessarily indicative of a long-term trend reset. As mentioned, it is policy that matters, and we are still several months away from knowing the full extent of changes going forward. President-elect Trump has an opportunity to make some constructive changes, but we haven’t seen the execution stage. A patient approach is warranted now.
As always, please do not hesitate to contact us directly if you have any questions or concerns. As mentioned, this communication is not meant to be a comprehensive and definitive guide to what lies ahead—it is merely an analysis based on what we know today. As we learn more in the coming months, we will continue to provide updates.
We wish you all a very healthy and happy holiday season.
This blog post has been prepared by Private Wealth Partners LLC, a registered investment adviser solely for informational purposes. This blog post does not constitute and should not be interpreted as an endorsement of any candidate or political party. This blog post is not an offer of or a solicitation of offers to buy or sell security or investment. The opinions expressed herein represent the current, good faith views of the authors as of the date hereof and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this blog post has been developed internally and/or obtained from sources believed to be reliable; however, Private Wealth Partners, LLC does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this blog post are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Private Wealth Partners, LLC assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. This material is directed exclusively at investment professionals. Any investments to which this material relates are available only to or will be engaged in only with investment professionals.