Much of the world woke up Wednesday morning of last week and was shocked. But should it have been? Markets do not like surprises, so it was understandable that the overnight reaction as Tuesday’s election results came in was negative. However, the markets seemed to discount the surprise quickly, cutting through the noise and seeing some cause for optimism.
What caused the remarkable turnaround in sentiment? President-Elect Donald Trump’s measured acceptance speech helped. But perhaps the markets finally saw some of what Trump’s supporters had been seeing all along.
The Malaise Our Economy Is In
A lot of mainstream commentary describes Trump voters, as well as others such as “Brexiteers”, as unschooled at best, xenophobic at worst, or simply unaware of where their interests truly lie. But maybe last week’s result showed that these voters have a deeper understanding of the malaise that the world’s economies are in than the global “elites”.
There are forces, such as globalization and technology, that are changing our economy and there is very little politicians can do about that. However, the lack of any meaningful fiscal policies to help enhance global growth has been a frustration to many. In previous CIO Weekly Perspectives we have discussed why monetary policy alone cannot get us out of this slow-growth environment. Our current 1-2% growth rate is not going to drive stronger income growth and the increased economic mobility that people want and need.
The electorate seems to have figured this out and was willing to overlook the personal flaws of Donald Trump to support a different game plan. They seem to have concluded that the game plan Secretary Clinton was proposing was more of the same. We shall see—but so far the markets seem to support the voters’ instincts.
My colleagues and I held a webinar early on Wednesday to discuss the election’s outcome. Our simple message was that we believe the result should be good for equities and bad for bonds. The market’s reaction, at least so far, is consistent with that view.
Why? We think that an increase in fiscal spending, particularly related to infrastructure and corporate tax reform, is achievable, and could have support from both sides of the U.S. Congress. In addition, significant regulatory reform should help spur business to invest more and unleash the proverbial “animal instincts”. It’s worth noting that we are leaving behind an administration that had fewer staff with private-sector experience than any other in recent history. Medium-sized companies in the energy, utilities, healthcare and financial sectors could benefit a lot from being unshackled from some of the well-intentioned, but ultimately obstructive, regulation that has come their way over the past 10 years.
Keep An Eye on Anti-Trade Sentiment
One area to watch closely is trade. In our view much of Trump’s platform is pro-growth, with the exception of trade. Anti-trade sentiment, in the U.S. and other developed market economies, could have a very negative effect on global growth. Policies such as renegotiating NAFTA, fighting TPP or increasing auto tariffs could set off a domino effect across the globe. How these policies and agreements get worked out will be telling. An early indication will be who Trump appoints as the new U.S. Trade Representative.
But we would reiterate that, while Trump’s “Contract with the American People” certainly contains anti-trade policies, it is otherwise a recognizably Republican program for shrinking government, lowering corporate taxes, reducing regulation and limiting the lobbying power of big business, combined with a fiscal stimulus targeting infrastructure.
Sentiment shouldn’t swing from despair to euphoria too quickly, of course. Trump doesn’t have a magic wand to wave on January 20th. Even if it were clear what the President needed to do, infrastructure takes time to build, reform takes time to agree on, and, keep in mind, more than half of the people who voted last week did not support this administration. But at least now there is no doubt that the people see that our economy is in a malaise—and that is the first step towards providing a remedy.
In Case You Missed It
- U.S. Presidential Election: Donald Trump pulled off an upset over Hillary Clinton and will become the 45th U.S. President. Republicans swept control of the House and Senate.
What to Watch For
- Tuesday 11/15:
- U.S. Retail Sales
- Wednesday 11/16:
- U.S. Producer Price Index
- U.S. NAHB Housing Index
- Eurozone Consumer Price Index
- Thursday 11/17:
- U.S. Consumer Price Index
- U.S. Housing Starts & Building Permits
Statistics on the Current State of the Market – as of November 11, 2016
|S&P 500 Index||3.9%||1.9%||7.9%|
|Russell 1000 Index||3.9%||2.0%||7.9%|
|Russell 1000 Growth Index||3.0%||0.9%||4.5%|
|Russell 1000 Value Index||4.8%||3.0%||11.6%|
|Russell 2000 Index||10.3%||7.7%||14.3%|
|MSCI World Index||2.3%||0.5%||4.5%|
|MSCI EAFE Index||0.1%||-1.5%||-1.3%|
|MSCI Emerging Markets Index||-3.5%||-6.2%||9.5%|
|STOXX Europe 600||0.2%||-1.3%||-5.2%|
|FTSE 100 Index||0.8%||-2.9%||12.0%|
|CSI 300 Index||1.9%||2.4%||-6.3%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||-0.2%||-0.1%||1.0%|
|Citigroup 10-Year Treasury Index||-3.0%||-2.6%||2.4%|
|Bloomberg Barclays Municipal Bond Index||-1.0%||-0.8%||2.1%|
|Bloomberg Barclays US Aggregate Bond Index||-1.5%||-1.3%||3.6%|
|Bloomberg Barclays Global Aggregate Index||-2.6%||-1.6%||5.1%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.0%||-0.3%||8.9%|
|BofA Merrill Lynch U.S. High Yield Index||0.0%||-0.9%||14.7%|
|BofA Merrill Lynch Global High Yield Index||-0.6%||-0.9%||13.0%|
|JP Morgan EMBI Global Diversified Index||-2.1%||-2.3%||10.7%|
|JP Morgan GBI-EM Global Diversified Index||-5.7%||-6.5%||8.5%|
|U.S. Dollar per British Pounds||0.3%||3.1%||-14.6%|
|U.S. Dollar per Euro||-2.4%||-1.0%||-0.1%|
|U.S. Dollar per Japanese Yen||-3.4%||-1.4%||12.9%|
|Real & Alternative Assets|
|Alerian MLP Index||3.7%||0.0%||10.7%|
|FTSE EPRA/NAREIT North America Index||-0.5%||-4.1%||1.1%|
|FTSE EPRA/NAREIT Global Index||-2.2%||-4.3%||0.6%|
|Bloomberg Commodity Index||-1.1%||-3.0%||5.1%|
|Gold (NYM $/ozt) Continuous Future||-6.1%||-3.8%||15.5%|
|Crude Oil (NYM $/bbl) Continuous Future||-1.5%||-7.4%||17.2%|
Source: FactSet, Neuberger Berman LLC.