The U.S. election once again showed that people have many concerns: social, economic, political. Analysts generally agree that policy makers can no longer wait and should work to address these concerns and heal the divides. How this will happen is uncertain and the election doesn’t change that in the short run. Regardless, the changes needed would have been required whoever was elected.
There seems to be a consensus that it is unclear if President Trump will think and act the same as the Donald J. Trump that ran for election. That answer won’t be known for a while, although he struck a conciliatory tone during his victory speech. While he has often addressed issues at a high level, there has been a lack of specifics about implementation. As a result, most analysts believe time is needed to have more clarity on the primary issues of trade, immigration, taxes, and fiscal and monetary policy.
This year’s Presidential election results certainly took most in the media and the financial world by surprise. The financial markets initially reacted dramatically to the news (many markets were down 5% or more). Now the markets have reverted quite a bit, rebounding even quicker than we experienced after the Brexit vote.
In general, the following post-election issues are expected to have an impact on the economy and financial markets for the next few months:
- Market volatility will be driven by the general lack of certainty and how aggressive the new administration acts on trade. Some analysts have suggested that a trade war could shave over 2% per year from GDP in 2017 and 2018, whereas a more reasonable approach to trade treaty renegotiations would not be as negative in 2017 and could be positive for economic growth in 2018. President-elect Trump has stated his top priority will be trade treaty renegotiation (NAFTA, especially trade with Mexico, and trade agreements with China), so it can be expected that this will become part of his agenda for the first 100 days. Depending upon the direction of the negotiations, the impact on financial markets could be more or less severe than anticipated.
- The Federal Reserve is still expected to raise rates in December, although the odds have decreased. Some analysts have voiced concern that the Fed, which doesn’t like uncertainty, may delay or prolong timing between rate hikes. However, others have gone further to suggest that trade protectionism under a Trump administration will be inflationary, putting the Fed in a mode to increase rates faster than expected. Needless to say, all eyes will be on the December Fed meeting for indication of their concerns and next direction.
- Tax reform and government spending, in the form of infrastructure spending, will be two other important concerns in the first 100 days of the new administration. With a full Republican Congress, analysts expect movement on these topics that could stimulate economic growth. However, both issues could also add to the government debt, if not properly funded.
- Government regulation, especially financial regulation such as Dodd-Frank, and the Affordable Healthcare Act are expected to be rolled-back partially or completely. Analysts would consider this situation to be pro-growth, and particularly supportive of the banking industry and small businesses. Lesser regulation could encourage more business investment by large corporations and increase consumer spending.
- Immigration was a major topic of discussion for candidate Trump. Analysts feel that with the Republican Congress, the country can expect to see some form of immigration reform and steps taken to increase border security. However, they note that the divisions within the Republican Party could give less clarity to this issue for a while.
- Given Mr. Trump’s pro-energy stance, oil and commodity prices could see longer-term support. Regulation repeal could benefit banks and the healthcare industry, and anything that encourages more bank lending is seen as a positive for private equity. In general, increased uncertainty and market volatility could support global macro strategies and active portfolio management.
- The new President will have to put forward his nomination to the Supreme Court, to replace Justice Scalia. Mr. Trump has published a list of conservative nominees, keeping the Court balanced, with a swing vote from Justice Kennedy. While this is not expected to have an economic impact in the short run, the Court’s opinions on business and financial matters could have a longer-term influence on the domestic economy.
- Last, this electoral result influenced by populism, quickly following the Brexit vote, could have ramifications for future elections. The upcoming Italian referendum and 2017 elections in France and Germany could be driven by additional support from the anti-globalization movement, which could eventually translate into weaker economic growth around the World.
Overall, most analysts have recommended a cautious, wait-and-see approach between now and the beginning of the year. By that time there should be more clarity about the make-up of the Trump administration and the issues that are moving to the top of their agenda for 2017.