Election Night Recap and Market Implications

Election Night Recap and Market Implications
November 9th, 2016

Most pundits and pollsters went in to last night’s election calling for a clear and resounding Clinton victory in the Presidential race, a narrow Democratic victory in the Senate and a continuation of a Republican majority in the house. Leading up to the election, markets rallied, indicating investor’s preference for a Clinton victory that would usher in more certainty on many relevant policies (trade, foreign policy etc.) and their impact on the economy and financial markets.

Clearly, Mr. Trump’s decisive Electoral College victory and the Republican’s sweep of Congress has shocked much of America and the world. As the results started coming in favorably for the Trump campaign last night, equity market futures sold off, virtually collapsing (down ~5%) when the Florida results came in. Short-term rates moved down and long-term rates moved up steepening the yield curve. The US Dollar, Euro, Yen and British Pound strengthened and gold rallied. All of these moves are classic “risk off” signs indicating investor’s fear of a less predictable president. However, as the night wore on, equity futures markets firmed and continued to do so following Mr. Trump’s acceptance speech (seen by many as conciliatory). Today, US Equity markets opened uneventfully and hovered around the flat line most of the morning, picking up steam into mid-day trading with S&P 500 up ~.80% by 12:45 EST. Healthcare and financial stocks are rallying while consumer staples and technology stocks are generally weak. Gold is up, but just marginally, while oil is has turned positive. The initial panic induced by the unexpected has, at least for now, abated. To that end, Mr. Trump’s acceptance speech was certainly helpful, but other factors are at play.

I believe investors took a deep breath and came to the conclusion that the world’s most dynamic economy is larger than one man or woman in the White House, that the lights would come on this morning, people would drive to work, that businesses would continue to turn out profits, that entrepreneurs would still start new ventures and that technological advances would still be developed. As I stated earlier, the markets were sending clear signals over the last several weeks that a more predictable Clinton Presidency was the path most investors preferred. However, based on what we can see so far this morning, perhaps investors don’t view Mr. Trump’s victory in the drastically negative light that many feared. Many of the factors that have been supportive of risk assets over the several months remain in place. Wages are improving, the consumer remains strong, jobs numbers look good, and S&P earnings are better than expected this quarter. The Republican sweep also presents a scenario that is likely to be very pro-business. Lower taxes, repatriation, healthcare reform, financial deregulation are all on the table and viewed as supportive of small and large businesses. Additionally, while the Republicans will control the White House and both houses of Congress, Mr. Trump is unlikely to have the unwavering support of many Republicans in Congress. Much of the trepidation around a Trump presidency has been predicated on his unpredictable behavior, isolationist stances on trade and hardline commentary on immigration. With many of the Republicans in the House and Senate vocally opposing his views on some of these issues, it is likely that he will have to exercise his negotiating skills not just across the aisle but within his own party as well.

Lastly, campaign rhetoric is difficult to translate into practical reality and policy. While it is too early to predict the impact of last night’s surprising election results, I believe it is safe to say that more uncertainty entered the picture. We will be following his cabinet appointments and his first 100 days very carefully. We are likely to see increased volatility in the markets as we move forward and digest the long term implications of this election, both domestically and abroad. In the short term, we do not anticipate material changes to our outlook or strategic allocations based on the election results. We would view any substantial weakness in equity markets as opportunistic, as our macro outlook for the economy and fundamental risk / return expectations remain positive for 2017.

As always, please feel free to reach out to us directly with questions or for further discussion. I leave you with a quote from Mr. Warren Buffet:

For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.

Best,
Josh L. Galatzan, CIMA^®
Meridian Wealth Advisors
Managing Director & Founder

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