It appears that the dog has caught the car – Donald Trump has been elected President.
The obvious question is – what will he do with it?
Donald Trump has won the Presidency with both fewer actual votes than Hillary Clinton (she won the popular vote), and less than a majority (50 percent). Republicans also maintained control of both the House and the Senate. The new President will thus have both houses working in his favor, which means many changes may be in order. I say “may” because nothing is ever simple with Mr. Trump. He needs to prove he can get along with the leadership of his own Republican party.
At least initially, financial markets don’t like it, because markets don’t like surprises, and this is a major surprise. Just after 1:30 am, Dow futures were down about 800 points, and S&P futures were down about 5 percent as well. Interest rates were falling across the Treasury yield curve, as investors fled to safety, and gold was up about 4 percent. Foreign investors, in particular, are made nervous by Mr. Trump, and they were likely driving much of the decline. After Trump’s victory speech, where he struck a conciliatory tone, markets generally reversed much of their losses. Interest rates on U.S. Treasuries are now spiking higher in anticipation of faster U.S. growth and continued Fed interest rate increases.
In the short term, we expect a market reaction similar to Brexit. A 5 percent decline purely driven by the election fallout is possible. Many market participants, particularly foreign players, have been caught “offsides” and will need to readjust their positions over the next few days. Key for the intermediate term (between now and year end) will be Trump’s comportment in his early speeches, particularly any comments he makes regarding Janet Yellen and the Fed, as the Fed has been calling the tune for financial markets both domestically and abroad for years. IF Trump behaves and speaks as he did in the final two weeks before November 8th, when he was much more classically “presidential”, rather than earlier in the campaign, that will bode well for both his presidency and the markets. As mentioned above, his initial comments calmed market fears.
Our initial thought is that a Trump election will eventually be good for main street, but maybe not a boon for Wall Street. This would obviously be a reversal from the last eight years, but not necessarily a bad thing. In our opinion, a key reason Barack Obama’s chosen successor was rejected was because his record at reviving the moribund U.S. economy was so poor. He was the only President in U.S. history not to preside over a single year of real GDP growth greater than 3 percent, and this was likely part of Hillary Clinton’s electoral undoing.
Mr. Trump has vowed to cut both taxes and regulation, each of which would be welcomed by businesses large and small. In our opinion, the regulatory shackles placed on the U.S. economy in the areas of Finance, Energy and Health Care (and others) are key reasons for the tepid growth we’ve seen over the past eight years. These regulations will likely be materially reduced in the next four years, and many of these reductions do not need Congressional approval, so many can happen quickly. This could be a big positive for U.S. growth.
Trump has also created a climate of fear regarding trade. A good portion of his political support came from people displaced by increased global trade, so he will need to mollify his constituency on this. The key question is: how far will he go in efforts to renegotiate key terms of U.S. trade? We don’t have an answer, and this is a big driver of market uncertainty. We do NOT believe, however, that Trump will start a worldwide trade war. As a businessman, he knows that the art of business is the art of the successful deal.
As always, Fort Pitt Capital Group will thoughtfully assess where opportunities present themselves and respond accordingly. This is a time for calm and prudent decision making.
We will have further comments on the election results later today, so please stay tuned.