Overnight, we witnessed America’s Brexit moment. Republican Donald J. Trump will now occupy the White House as the 45th leader of the ‘free world.’ Was this a Trump vote, or merely a protest vote against the establishment? Trump has won by presenting himself as an advocate for fairness and the American Dream to a disenfranchised middle class. Now, the conversation has turned to whether he can deliver.
Throughout the campaign, we have witnessed market volatility on the mere sniff of a Trump victory. In the days leading to the election, we experienced some calm as commentators and markets predicted a Clinton win.
Yesterday, as the votes were counted, we witnessed a negative shift in Asian (2% in Australia & 5% in Japan) and US markets as Trump emerged as the clear winner. However, overnight the response has been markedly more subdued, even positive. How long this volatility will last is an unknown quantity.
We do acknowledge that many of Trump's policies could be highly stimulative to the US in the medium-term, including:
- Corporate and individual tax cuts;
- Fiscal spending on infrastructure, domestic construction and defence;
- Less regulatory intervention particularly on environmental issues, to the benefit of fossil fuel, shale and coal producers, and the financial sector;
- Immigration control, bolstering citizen participation in sectors such as agriculture; and
- Protectionism via the imposition of tariffs and restrictions on free trade.
Trump’s power will be restrained by the US legislative process, whereby all federal legislation must be approved by Congress.
Although the Republicans have secured a majority, members of his own party may ensure any extremist policies are quelled. We anticipate that Trump’s advisers will educate him on the implications of repatriation and protectionism, and his stance may have to soften by sheer virtue of his position.
It is predicted that interest rates in the US may stay lower for longer to support market sentiment, and eyes will now be on the next US Fed Reserve meeting in December. Irrespective of this, there are a number of studies which have shown that the outcome of the election has little long-term impact on the performance of US financial markets.
There is no doubt that there will be some short-term pain and uncertainty as financial markets digest what this now means for the US and the broader global economy. The Obama administration has expressed sentiment for a smooth transition, and let’s hope Trump keeps his word to “seek common ground, not hostility, partnership, not conflict.” The one thing we know for sure is that the world will go on.
This outcome reiterates First Financial’s view that we must remain resilient, and reaffirms the importance of our investment philosophy, purposefully designed to weather these short-term shocks.
Head of Investment Committee, First Financial