This morning we woke to the stunning news that Donald Trump upset Hillary Clinton in the Presidential election. Polling data heading into Tuesday strongly suggested a Clinton victory, and capital markets are reacting to the surprise Trump victory globally and across asset classes. World events continue to highlight the difficulty of predicting macro related outcomes (first Brexit, now this) and remind all of us that “the improbable” can just as easily be described as “the possible.” Just ask any Cubs fans!
Speaking with many clients over recent weeks and months, we recognize and empathize with the concern many of you are likely feeling this morning. Setting aside any personal political bias any of us may harbor, this has been an emotional campaign and the outcome is likely triggering an even more visceral reaction today. Holding emotions in check, remaining disciplined to long term objectives, and not making knee-jerk investment decisions is one of the crucial functions professional investment advisors provide. Today we stress patience. Acting out of fear and selling in a panic is a bad strategy. We suggest this time is no different.
It’s also worth noting the crucial role asset allocation and balanced portfolios play at just these moments. We have bemoaned the recent lack of yield on fixed income investments and the associated impact on balanced portfolio returns, but the stability that bond allocations provide in times of stress is invaluable and adds additional comfort and willingness to remain long term with our equity holdings.
Moving beyond the behavioral response, a Trump victory does have multifaceted implications for markets and individual companies. To touch on just a few:
Pharmaceutical company stocks should react favorably as investors feared drug pricing regulation under a Clinton administration. Prop 61 failing in California (a drug pricing initiative) provides additional support. With a Republican majority in both the House and Senate, Obamacare is likely to face challenges presenting additional questions for health insurance and care providers.
- The Trump campaign’s protectionism message bodes poorly for companies that rely on foreign trade. Moreover, trade’s impact on U.S. economic growth has the potential to be a swing factor. Tariffs and trade wars are typically inflationary, which would be negative for bond returns.
Increased military spending should be a boon for defense stocks. Early estimates are for a 15% increase in the defense budget.
The potential for deregulation in the banking industry after years of stricter control should support financial stocks.
Both candidates advocated for increased infrastructure spending and shovel-ready jobs. Mr. Trump highlighted this in his speech last night. Stocks levered to this outcome have been reflecting a strong outcome for most of this year.
Trumps campaign policies also imply lower taxes on corporations and individuals. Federal deficits likely expand in this scenario which is negative for fixed income. The big question remains if a tax cut would spur enough growth to offset the hit to the budget.
There are many other implications we won’t cover here (Fed policy reaction, offshore cash repatriation, business and consumer confidence, etc). We will continue to monitor all the issues and how they impact our companies. Our important message is to remain calm and stay disciplined. A Trump victory increases uncertainty, and markets reflected this overnight. But uncertainty and volatility on the political front have historically proven temporary. We never suggest trying to time markets. We always advocate using this type of volatility to purchase securities when they are mispriced. We have the benefit of not being index buyers, we can look to individual companies across the market and be opportunistic. We support sticking to long term allocations and buying high quality, shareholder friendly companies when they are being sold at a discount.
We will keep you updated as the situation unfolds, as we expect things to remain fluid. As always, if you have any concerns or want to discuss the implications on your portfolios, please contact us. We look forward to speaking with you.
Please Note: Examples shown are for illustrative purposes only and do not represent the performance of any account, portfolio, composite of accounts or specific recommendation of Boston Financial Management. Your actual performance will vary based on your particular circumstances and should be adjusted to reflect management fees and trading costs. Investment in securities involves risks, including the risk of loss of principal. Past performance is not a guarantee of future returns. IRS Circular 230 Disclosure: Pursuant to IRS Regulations, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.