November 9, 2016
Written by Nathan Erickson, CFA®, CAIA, Chief Investment Officer
This morning, the United States woke up to the reality that Donald Trump has been elected the 45th President. As an investment advisory firm, we tread lightly on political positioning; however, we feel it is appropriate to address this news in the context of our portfolios, and the potential impact to markets and the economy. We will attempt to conclude with some reasons to be optimistic, regardless of whether you are in a state of elation or depression as you read this.
From a stock market perspective, we need only to look to the Brexit vote earlier this year for guidance on how markets will likely respond. Those of you who followed the election results throughout the evening saw updates stating that the market was down hundreds of points at various times throughout the evening. While the actual stock market is only open from 9:30am to 4:00pm EST, there is a futures market which trades nearly 24 hours a day and can often indicate the direction of the market the following day. As the evening went on we saw the futures market respond in various magnitudes, at one point indicating the market would be down 5%. As we’ve stated before, the market responds negatively to uncertainty. Market movements over the last several days indicated that the expectation was for Secretary Clinton to win. A Trump victory created uncertainty, particularly around his potential policy decisions. While a Secretary Clinton victory would not necessarily be good for markets (higher taxes, more regulation), at least it meant a likely continuation of what the market has become used to over the last eight years.
When the U.K. voted to pass Brexit, the U.K. market was down 10% the following day. Once again, this is because the market expected Brexit to fail, and a passed vote created uncertainty. The U.K. market quickly recovered the following week, as investors realized that the vote had no immediate impact on the current economic environment. We can reasonably expect the same out of the U.S. market over the next several days. While we may see volatility in the short term, President Obama remains President until January, 2017. Furthermore, while President-elect Trump’s campaign rhetoric may create uncertainty, in almost all cases he must engage other elected officials to accomplish his goals. At this point in time, nothing has changed.
How the Stock Market Tends to Perform On and After Election Day
|Election Winner||Election Day||% Change After Election Day|
|Barack Obama (D)||11/4/2008||-5.27|
|Harry S. Truman (D)||11/2/1948||-4.61|
|Franklin D. Roosevelt (D)||11/8/1932||-4.42|
|Franklin D. Roosevelt (D)||11/5/1940||-3.32|
|Barack Obama (D)||11/6/2012||-2.37|
|George W. Bush (R)||11/7/2000||-1.58|
|Jimmy Carter (D)||11/2/1976||-1.14|
|Dwight D. Eisenhower (R)||11/6/1956||-1.03|
|Ronald Reagan (R)||11/6/1984||-0.73|
|William Clinton (D)||11/3/1992||-0.67|
What a President Can and Can’t Do
For many citizens, there is a genuine fear that Trump will create havoc by deporting all illegal immigrants, destroying global trade, and possibly engaging in military conflict. We consulted the website www.trumanlibrary.org for a brief summary of what a President can and cannot do:
A president can: make treaties with the approval of the Senate, veto bills and sign bills, represent our nation in talks with foreign countries, enforce the laws that Congress passes, act as Commander-in-Chief during a war, call out troops to protect our nation against an attack, make suggestions about things that should be new laws, lead his political party, entertain foreign guests, recognize foreign countries, grant pardons, nominate Cabinet members, Supreme court justices and other high officials, appoint ambassadors, talk directly to the people about problems, and represent the best interest of all the people.
A president cannot: make laws, declare war, decide how federal money will be spent, interpret laws, or choose Cabinet members or Supreme Court Justices without Senate approval.
From a Federal Reserve perspective, Governors of the Federal Reserve are appointed to terms of fourteen years to ensure agency independence. While Janet Yellen could step down, she cannot be removed by the new President-elect.
In President-elect Trump’s acceptance speech, he made no references to those controversial topics of illegal immigration or unfair trade agreements. One of the first things he did was to specifically address those who had not supported him, and ask for their guidance and support in working together for the betterment of the country. In fact he mentioned several times the desire to cooperate with those in Washington to serve all Americans. From these comments it appears that President-elect Trump understands that he will need the cooperation of those in Washington to be successful.
Have We Ever Seen This Before?
President-elect Trump is the first President to have never served in a government office. However, he is not the first President to be elected under scrutiny of his qualifications or temperament. In 1980 America had just come out of an unsuccessful foreign war. The economy was struggling, and governments in Iran and Russia were acting in ways that generated concern among Americans. In the midst of this, a candidate for President emerged who horrified some people and captivated others with his promises to restore America to power and prosperity. While running against Jimmy Carter, critics perceived Reagan as a reckless ignoramus with a simple-minded view of the world and a knack for exploiting racial resentments.
And while we’re not trying to say that President-elect Trump is or could be the next Ronald Reagan, we are willing to acknowledge that previous President-elects have entered office under a cloud of doubt and uncertainty. If we’re willing to look further into history, the race between President John Quincy Adams and Andrew Jackson in 1828 was particularly ugly. Partisan newspaper headlines made accusations ranging from murder and adultery to pimping against the candidates. Furthermore, former President Dwight Eisenhower said this about President Lyndon B. Johnson “He hasn’t got the depth of mind nor the breadth of vision to carry great responsibility… Johnson is superficial and opportunistic.” Our point is not to justify any of President-elect Trump’s failings, but to remind our readers that we have seen challenging candidates and Presidents in the past and this great nation has continued to survive and prosper.
Reasons for Optimism
We believe, regardless of your political leaning, there are reasons to be optimistic about the next four years, as one should be every time a change in government occurs. At its core, an election represents the choice of the people of who will carry out their best interests. We may or may not agree with the outcome of the election, but we should agree that it was the will of the majority of our people.
We remain optimistic due to the fact that changes to our laws and policies almost always require the input of the Senate, the House of Representatives, and the President. President-elect Trump cannot accomplish much without the support of our elected representatives. Furthermore, with the Republicans controlling the Senate, the House of Representatives, and the White House, we can reasonably assume that passed legislation will typically reflect Republican values. As it relates to the economy, this could mean reduced taxes, reduced regulation, and more fiscal stimulus. President-elect Trump’s victory speech specifically addressed increased infrastructure spending, which would be good for overall economic growth. While tarrifs and renegotiating trade agreements could have a negative impact on the economy, he also stated that the U.S. will get along with all other nations that are willing to get along with us, and that while we will always put America’s interest first, we will deal fairly with everyone.
Finally, we remain optimistic because President-elect Trump must surround himself with talented people to be successful, and he’s already indicated that he’s capable of doing that. Many Republicans were much more impressed with Vice-President Elect Pence than President-elect Trump; however, we must remember that Mr. Trump selected Mr. Pence. In President-elect Trump’s victory speech he specifically thanked several members of his team, including RNC Chairman Reince Priebus and Senator Jeff Sessions, indicating that he understands the need to work together with those already in the political realm. If he continues down that path and selects a Cabinet of qualified, talented individuals, he may turn out to be less like the Trump we saw in the debates and more like the Trump who won the election and told his supporters that we owe Secretary Clinton a debt of gratitude for her years of service to the country.
We believe the appropriate response to Donald Trump as our 45th President should be no different than what our response would have been to Hillary Clinton as our 45th President. We may see markets decline in the near term, possibly for several days; however, the outcome of the election has had no impact on the current economic environment of our country, nor on the ability of our investments to make money. Market volatility in the near term is simply speculation on what could happen, with no evidence to support it. As President-elect Trump’s policies become clearer, it may warrant a change in the portfolio. However, at this time we believe our portfolios are well constructed to manage short-term volatility and continue to deliver a meaningful return over the long-term.
We welcome any questions or comments you may have regarding the outcome of the election or the impact on portfolios, and we encourage you to reach out to a member of your engagement team.
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