An early look at the implications of the election.

Donald Trump has won the White House and Republicans have won a larger-than-expected majority in the Senate. The outlook for the House is still unclear but is leaning towards a narrow Republican majority and therefore a Republican election sweep. Below we provide some thoughts on the policy priorities under the Trump administration, the impact on financial markets, potential risks, and what investors should really focus on.

Policy Priorities: The strong showing by President-elect Trump and the Republicans across the board will allow the party to move forward with its policy agenda.

• Making individual income tax cuts permanent.
• Keep corporate tax rates low and possibly lower them further.
• Increased use of tariffs across the board against trading partners.
• De-regulation of industry will be a top priority.
• A crackdown on immigration and a focus on sealing the border. 
• An emphasis on ‘de-globalization’ and re-shoring industry domestically.  The administration is likely to pull back from foreign commitments and seek to bring industry back home.

Financial Market Impact: Below we highlight some of the expected market impacts as a result of the above policy priorities. 

• Higher interest rates and yield curve steepening. Trump’s policies are viewed to be somewhat inflationary due to higher projected budget deficits, higher tariffs, and curbs on immigration.
• A higher U.S. dollar. As a result of higher fiscal spending, economic growth, higher interest rates, and tariffs.
• Small-cap stocks should perform better. Trump’s pro-growth, domestically oriented policies, and tax cuts should benefit small caps.  This may be offset a little by higher interest rates.
• Domestic stocks. Trump’s protectionist policies will likely benefit domestic industries (at least initially), while other countries' retaliatory policies may hurt U.S. multinationals.
• Value stocks.  Historically, value outperforms growth when interest rates are rising, and yield curves are steepening.  Will also benefit from pro-growth policy and lower tax rates.
• Sector winners- financials, industrials, energy, and materials.  These sectors will benefit the most from deregulation, protectionist policies, and reshoring.
• Sector losers- utilities, alternative energy, and retail. These sectors may struggle from higher interest rates, higher costs from tariffs, and less favorable policies.
• Cryptocurrencies will remain highly speculative but may benefit from a supportive Trump administration.

Market Risks: There will likely be a tug-of-war between optimism for Trump’s reflationary policies and the impact they will have on deficits, interest rates, and inflation.  There is likely to be initial momentum behind Trump’s policies but how the tug of war plays out will determine its long-term success.

• Economic growth fails to live up to expectations.
• Lower taxes and higher spending may cause deficits to balloon, leading to significantly higher interest rates.  The bond vigilantes may emerge after a long hibernation to drive interest rates up in an attempt to contain deficits.  Ultimately leading to lower economic growth.
• Tariffs may drive costs broadly higher, increasing inflation and especially hurting lower-income households.  
• Trade wars emerge that drive costs higher and slow economic growth.
• Aggressive immigration policy and deportations turn out to be a logistical nightmare, expensive, and hurt economic growth.
• An increase in geopolitical risks as the U.S. pulls back from global affairs and alliances.

Summary: Most of our comments above are widely known by market participants and a lot of uncertainty remains about which policies will get approved and the long-term impact they will have on financial markets. No one really knows for sure and, as always, most individual investors would be wise to focus on the following questions:

• What are my financial goals?
• When do I need to reach them?
• How much risk can I tolerate?
• Do I have an appropriate asset allocation for my goals, time horizon, and risk tolerance?
• How can I make the transition from accumulating assets to decumulation during retirement?
• Am I investing in a tax-efficient manner?
• Am I maximizing my overall life well-being, not just my financial well-being?

If you have any questions regarding this commentary or the above questions, please give us a call.