With election uncertainty finally out of the way, investors now need to grapple with a new question: how does this change in the US political landscape affect markets and market expectations? Is it time to be greedy, or fearful?
Assuming the two undecided states, Michigan and New Hampshire, fall to the current leading candidate, then President Elect Donald Trump will secure 306 Electoral College votes to Hillary Clinton’s 232. Which means the Republican Party will win majorities in both the US Senate and the US House.
The biggest fear is the potential threat to global trade, where, for example, Trump canvassed the renegotiation of NAFTA (The North Atlantic Free Trade Agreement) and rejection of the TPP (the Transpacific Partnership Agreement). This latter agreement, seven years in the making, covering 12 TPP nations and 40 per cent of the global economy, was expected to deliver valuable new markets for Australia’s beef, wheat and dairy industries.
Trump’s “tough on China” stance will cause markets the most consternation if the proposals of 45 per cent tariffs and reacting to China being a “currency manipulator” ever come to fruition.
Repeal of the Affordable Care Act (Obamacare) will likely be negative for selected US healthcare and related companies as the government’s expansion of the Medicaid program for the poor is put on hold.
The potential for fiscal stimulus, lower corporate taxes and tax holidays for the repatriation of offshore funds may be positive for the US Dollar, but it is also likely to be negative for bond yields. In recent months, the yield for US ten-year treasuries has jumped by 0.7 per cent from an all-time low of 1.36 per cent to 2.06 per cent. (Australian ten-year government bond yields have followed suit, rising from 1.8 per cent to 2.5 per cent).
Finally, any jump in US inflationary expectations could see the US Federal Reserve pushing the cash rate up quite quickly over 2017. The Federal Open Market Committee next meets in mid-December and an increase from 0.25 per cent to 0.5 per cent seems likely.
It is very difficult to know how this plays out for share markets around the world. While volatility is likely to be greater, the team at Montgomery will continue to focus on high quality businesses with good prospects at reasonable prices.