Last night’s election results provided two important lessons for investors:
Lesson One: The market is the best poll of all.
Following Brexit and last night’s election, no one will view polls the same ever again. However, leading up to Election Day, market returns and sector performance, specifically in Energy and Financials, were indicating a Trump victory, counter to the consensus view and poll results.
Lesson Two: It’s still (and always) about the fundamentals.
Last night served as a perfect reminder that it’s not about what should be; it’s about what will be. It is easy to get caught up in personal perspectives and political ideals; but as investors, we must focus on what we expect to take place in the market. Ultimately, any political outcome matters to the market largely to the extent it impacts earnings and interest rates. To that end, we remain focused on the fundamentals and identifying attractive long-term investment opportunities.
Single party rule
We see three implications to this shift. As discussed during the campaign, we expect to see an increase in fiscal spending, particularly in the areas of infrastructure and defense. While fiscal spending will have a modest positive short-term impact on our country’s growth, it will need to be paid for, which will likely result in higher bond yields. Secondly, single party rule opens the door for tax repatriation, allowing companies to bring foreign earnings back to the United States. Those earnings in turn can be used to fund capital investments, and, to a lesser degree, stock buy backs and mergers and acquisitions. Third and most importantly, last night’s results significantly raise the odds of meaningful tax reform. This is what we will be watching most closely, as it has the greatest potential to drive earnings higher.
Lastly, throughout the campaign there was significant focus on the role of the Federal Reserve (the Fed) and its leadership. Barring significant market volatility, we expect the Fed to stick to a very gradual tightening cycle and raise short-term rates in December. We also expect Janet Yellen to continue in her role as Chair until her term expires in 2018.
In closing, we will continue to monitor the fundamentals and remain committed to protecting client assets. Thank you for the continued trust you place in us. If you have questions about your portfolio, please let us know.