Now that one of the most contentious and downright nasty Presidential elections is over, what have we learned? Here is one take on it: if you are a Trump supporter, his narrative was figurative; whereas if you are a detractor, it was literal. A figurative Mr. Trump might be understood as follows: “wall” really means “reform”, “replace” equals “revise”, and “jail time” could even mean “patriot”. Regardless of your take, we all admit that markets have been on a tear since the election. With equity markets now at all-time highs, the market’s “Trump Bump” has continued into a full-on Santa Clause rally.
However, if we look back at history, we discover that this type of market performance in not unprecedented. Based on data from Dorsey Wright, a leading research and market index firm, the US equity index has advanced over 4% on average in the month of November when a Republican presidential candidate is elected. This November’s gain of 5.4% is slightly better than average. While we knew the election results could have injected a bout of volatility, we took our ques from the “Brexit” vote, a time when most investors were rewarded for maintaining their portfolio allocations (see our post-election write up).
So, what does this mean for the markets going forward? The expectation is that President Elect Trump’s administration will be pro-growth and will lower regulatory burdens. With that in mind, let’s look at a few areas that we believe merit attention for 2017.
Financial regulation, we believe, will be in the cross hairs of the new administration. There is some expectation that changes will be taking place to the Dodd-Frank Act, the post-2008 financial reform act which many investors believe has stifled bank-lending. We believe that this would benefit financial institutions both large and small. We also believe that the Department of Labor’s fiduciary and overtime rules will come under the same scrutiny. We believe any changes to these laws could have a meaningful impact for small businesses.
Recently-implemented SEC rules that require certain money market funds to calculate their daily value will likely change the way institution and individuals think about the safety of their cash positions. There are now rumblings that these rules could also be revised. This change would simply revert back to the way it was previously.
The President-Elect is in the midst of announcing his cabinet and other appointed positions. These appointments are setting the tone for much of what we believe is to come during 2017. While “Trump and friends” are dominating the news cycle, there are a couple of interesting things that are going on outside of the US that we wanted to point out.
If Trump were to follow through on his tough trade talk, the resulting protectionism could be destabilizing for global markets…although the people he has named for cabinet positions don’t seem to have the back-ground to favor trade wars. Another factor is the set of upcoming national elections in France, Germany, and the Netherlands—which, like the recent Italian referendum, are considered yes-or-no votes on the EU. Britain will also be exercising Article 50, which will be the official beginning of the “Brexit” negotiations. And finally, global monetary policy is becoming less effective, which is one reason there is more talk about fiscal policy, at least here in the US.
Given all of this, and markets being at new all-time-highs, it is no surprise that volatility is likely to increase. There are lots of things out there to make people nervous. We continue to hold to our allocations for our clients. We are still expecting the US to lead the way and are keeping our eye on Europe and Asia. Trade, reform, and growth will be at the forefront. We will see how much longer the rally continues.
As we move closer to inauguration day, we are constantly reminded of Forrest Gump’s box-of-chocolates analogy: “You never know what you are going to get.” And thanks to a certain someone’s love of Twitter, we are certainly experiencing that first hand.