Donald Trump continues to stun. Having up-ended politics as usual to win the Presidency, the polarizing business mogul is now in a position to reshape American public policy on a grand scale. How will Trump’s unexpected victory and Administration impact the markets and your personal finances?
Short Term Turbulence?
The stock market is non-partisan. All it cares about is certainty. It likes what it already knows. Hillary CIinton represented the familiar, while Trump is an unknown. This explains the dramatic plunge in U.S. stock futures that occurred on election night. At one point futures were down the maximum allowable 5%. This event was in keeping with market dips that occurred during the campaign every time Trump ticked up in the polls.
Interestingly, by Wednesday morning, the markets had largely settled with the Dow Jones Industrial Average flat. Of course we could still see gyrations as Trump sets his agenda, announces policies and makes the gaffes that are inevitable as a new administration gains its footing. But we believe this is yet another time when investors need to stay strong. Exiting the market now would be a mistake. The smoke from this event will clear (as it always does) and the market will eventually settle. If anything, any dips in the coming weeks should be seen as a time to make strategic additions to your portfolio and reduced process.
Interesting side note: The stock market once again accurately predicted the winner of the Presidential race, as it now has in 20 of the past 23 elections. When the market is down in the months leading up to Election Day the non-incumbent party nearly always wins the Presidency. That’s what happened this year, as the S&P 500 was down about 2% in the three months leading up to November 8th.
The Other Election
While most of the discussion this morning has focused on the Presidential outcome, the GOP’s retention of the House and Senate are hugely significant as we analyze what’s next for the markets. Republican control of the House of Representatives is a proven indicator of strong positive market activity.
Between 1933 and 2015 (with the exception of 2001-2002) the market has seen average returns of 15% when Republicans controlled the White and both houses of Congress, as they will again come January 2017.
When a Democrat was President and the GOP held the House, returns dipped to 13.6%. In periods when a Republican President faced a Democrat-controlled House, returns were just 10.8%. In those years when the GOP held the White House and Dems controlled both chambers of Congress, returns were just 4.9%.
Winners and Losers
Our investment committee here at CIA has for several months been analyzing the industry-specific implications of a Trump victory. Here are our key conclusions:
- Defense – A Trump win means additional military-related spending, potentially as much as a 15% uptick.
- Financials – Less regulation from a Republican Congress coupled with the prospects of additional economic growth are likely to benefit the sector.
- Pharmaceuticals and Biotech – These stocks had been punished on the prospect of more regulation in a Clinton administration. But the sector got a trifecta of good new on Tuesday. A California ballot initiative to limit drug prices was defeated, Hillary lost and Republicans kept Congress.
- Oil/Gas and MLPs – Trump is in full support of fewer restrictions on drilling and fracking. There are more than 20 stalled pipeline projects that could get reignited right out of the gate. And while this may not help the price of oil directly as more supply comes on line, it should create job and generate royalties for investors in MLPs.
- Health Insurers and Hospitals – The Affordable Care Act will likely be replaced with an alternate plan. We don’t think it will be completely repealed, as it would be politically difficult to take away insurance and subsidies from millions of people. But we could see the individual insurance coverage mandate repealed and a lowering of premium subsidies. This would mean fewer people with insurance and thus lower usage of medical services.
- Renewable Energy – The Clean Power Plan will not be implemented, environmental regulations will likely be relaxed, and some renewable tax credits may be removed.
- US Multi-Nationals – Trump’s win delivered a mixed bag for multi-nationals as more restrictive trade policies could raise the cost of business while reduced US taxation of repatriated foreign profits would be a windfall.
Regardless of one’s personal feelings about the election outcome, it is important, as an investor, to evaluate this new terrain objectively. We urge all our clients to stay their course in the coming weeks as the markets, our government and the nation react, adjust and adapt to this new and unfamiliar reality.