Beutel Goodman: Initial Thoughts on Trump Victory
November 9, 2016
The result of the U.S. election has clearly taken financial markets by surprise. Similar to the Brexit vote this past summer, the vote has revealed a strong undercurrent of discontent. The vote for Donald Trump was more a vote against the economic, social and political status quo than a vote for the improbable agenda he proffered during the campaign. On the issues of trade, taxes, monetary and fiscal policy, his statements have often been confusing and even contradictory. For example, he has promised to raise interest rates and disrupt trade arrangements while at the same time boosting U.S. growth. He has also committed to both tax cuts and significant infrastructure spending. Clearly, there is a large gap between campaign rhetoric and reality that will need to be closed.
While the uncertainty created by this situation is a negative for markets, there is simply not enough information for proper risk analysis. Any one of Donald Trump’s proposals could potentially have a mix of negative and positive impacts on the companies in our portfolio, but this is all hypothetical at this point. What we do know is that the valuation of each of our positions in the portfolio remains well supported by sound fundamentals and strong business models that have proven resilient to exogenous challenges in the past.
In the near-term we expect there will be an increase in market volatility. This may present opportunities both on the buy and sell side. As always, however, our decisions will be based on analyzable determinants of bottom-up value and not on top-down speculation.
Immediate overnight reaction to the election results was violent, with stocks plummeting, bond yields falling, gold up, oil down, and the U.S. trade-weighted dollar increasing. As the sun rose in the morning, stock markets fully recovered their 5% loss to finish stronger on the day. Bonds, on the other hand, are now discounting Trump’s policy of tax cuts, infrastructure spending and larger deficits as inflationary which has led to much higher yields.
The markets had largely agreed with the poll results and priced in a Hillary Clinton presidency. The polls once again misled markets that this election was simply a choice between two individuals and overlooked the immense frustration of a very economically divided electorate. As a result, we believe the electorate focused on the message and not on the messenger.
The message Trump has been sending is one of broad change. He would like to reduce personal and corporate taxes, launch a fiscal spending program, renegotiate trade deals, change the way Washington works, and make changes to the existing immigration, climate, health and financial regulation policy. The clean sweep by the Republicans of the White House, Senate and Congress enables the execution of many of these programs. What is lacking is a way of paying for these programs and a measure of the annual deficit that these changes would create. The bond market is responding to this fiscal uncertainty.
Implications for Bond Strategy
- Going into the election we moved from a short duration position to neutral due to the uncertainty of the outcome, as we felt it best served clients to be cautious.
- Credit spreads are tighter with the rally in risk assets. We remain overweight investment grade credit.
- Interest rates are being repriced to take into account the uncertainty surrounding the Trump Administration’s possible agenda.
- If monetary policy is being assisted by fiscal policy, the Federal Reserve can continue to increase the level of Federal Funds interest rate.
- Flows into safe haven bond markets such as Canada and the U.S. could continue to place downward pressure on the yield curve from international events.
Should you have any questions, please direct them to Bruce Shewfelt, Managing Director, Client Service & Marketing at (416) 932-6345 or your Beutel Goodman relationship manager.