No matter what your political persuasion, the election of Donald Trump as president at least resolves some of the uncertainty that the stock markets had been operating under for months, financial industry leaders said this week.
The election results are likely a mixed bag for the economy and the markets, they said. Some of Trump’s proposed plans may lead to a renewal of inflation and negative headwinds for fixed-income investments. But other parts of the economy have responded positively.
Murphy O’Flaherty, a senior portfolio manager and senior equity analyst for small-cap equities at the Boston-based office of RBC Global Asset Management, said, “Expectations are for less regulation, which could result in more mergers and acquisitions activity.”
“For example, the biotech and pharma industries have had less M&A activity over the past few years, and some of that is related to regulation and oversight, as well as higher interest rates. If M&A activity picks up, this would generally be perceived as good for small-cap equities and smaller companies,” O’Flaherty said.
In addition, “a Trump win could be perceived as positive for metals, mining, energy, financials and banks, but it might create a headwind for alternative energy, especially wind, and this could negatively impact companies associated with climate change,” she added.
Jasper van Brakel, CEO of RSF Social Finance, a San Francisco-based sustainable investing firm, agreed.
“Many of the policies proposed by the president-elect and his allies, if implemented, will reduce public support for climate change initiatives and targeted economic development in under-resourced communities,” said van Brakel. “Community-based clean energy, for example, is a crucial growth area that could stall out unless private investment replaces lost public support.”
On the other hand, Trump’s win is seen as a positive for the U.S. dollar, according to Anthony Kettle, senior emerging markets portfolio manager at the RBC Global Asset Management office in London.
Trump’s presidency will probably result in “stricter regulations and tariffs primarily aimed at China, which would likely result in a strong U.S. dollar [that would] negatively impact the Chinese currency, and also likely the currencies of Korea, Taiwan and Vietnam.” This would also be a positive for U.S. manufacturing, though it would raise the cost of domestic goods, he said.
Thomas Hempell, the head of macro and market research at Generali Asset Management, a Europe-based investment management firm, said, “Financial markets have responded to the Trump victory with a rise in U.S. yields, the U.S. dollar and equity markets.”
Political uncertainty itself has vanished as a worry. There was no recount after the election this week, and no social unrest followed, so there’s a good environment for the usual post-election risk asset relief rally, Hempell said. This likely will create a tailwind for global growth, partly offsetting the negative supply shock expected from higher tariffs.
The markets responded as expected on Wednesday, according to Erik Weisman, chief economist and portfolio manager at MFS Investment Management, a Boston-based asset management company with about $626 billion in AUM.
But Trump’s victory could usher in a more inflationary environment, he added. It will also mean in the future an emphasis on developing energy sources that are considered dirtier and a de-emphasis on the cleaner sources.
Conflicting Pressures
There will be conflicting pressures on economic growth, depending on which Trump initiatives are enacted. For instance, a mass deportation of immigrants may be what the administration wants, but it would be very expensive and would be a negative for economic growth, Weisman said.
In addition, unilateral tariffs could lead to a trade war, which would work against economic growth domestically. That would also leave China in a worse economic plight than it is now, he added.
“There are still a lot of unanswered questions” for how this will play out, Weisman said. Even though one significant election is done with, another will be coming in two years, and Trump already has to consider the impact of his actions on the future.
Though Trump’s victory might be a good harbinger for equities, the bullishness for fixed income could fade, said Andrzej Skiba, head of U.S. fixed income at the RBC Global Asset Management office in Stamford, Conn. A 10% tariff across the board “would add 1% to inflation,” he said.
“If you add 1% to next year’s inflation numbers, we should say goodbye to [interest] rate cuts. With higher tariffs, the Fed will not be in a position to cut rates even if the economy is slowing down, and that is a toxic mix for fixed income,” he said.
Anthony Kettle, senior emerging markets portfolio manager at the RBC Global Asset Management office in London, said there was a mixed view of tariffs aimed at China. While it could raise revenue for U.S. companies and result in a stronger dollar, it could raise the cost of domestic goods.
“In turn, China may be faced with a glut of goods that will then be dumped on other economies without the same level of tariffs as the U.S., reinforcing the disinflationary trend in many other economies, including those of the emerging markets,” Kettle said.
The result of China tariffs could result in “the U.S. trading more closely with Mexico in place of China, particularly given the existence of the North American Free Trade Agreement, which is aimed at fostering trade relations between Mexico, the U.S. and Canada,” he said.
Deborah Cunningham, CIO for global liquidity markets for Federated Hermes, agreed. “Trump’s economic agenda could be inflationary, but money markets are already turning their attention to the upcoming Fed meeting. In the short term, Trump’s victory means less to the money markets than to other asset classes,” she said.
“In the long term, however, we are concerned that some of his economic policies, particularly tax cuts, higher spending and tariffs, could be inflationary and increase the national debt,” Cunningham said. “Also, increased regulations on banks could affect the money supply. We are likely to see a new tax law that mimics or even lowers taxes when the Tax Cuts and Jobs Act expires late next year. This could mute the demand for muni securities and cause their yields to increase.”
Stephen Auth, CIO for global equities at Federated Hermes, said the firm is watching the bond market selloff closely to determine how it affects clients’ portfolios.
If there’s a red sweep and the House of Representatives is also controlled by the GOP, it will revive positive attitudes among business owners, said Jeff Schulze, head of economic and market strategy at ClearBridge Investments, an investment management firm based in New York City.
“We expect that a red sweep could rekindle the Trump pro-business approach, which could lead to a more robust capital expenditures and investment environment. A more favorable corporate tax regime, full extension of the Tax Cuts and Jobs Act, and a lighter regulatory touch should outweigh the potential headwinds from increased tariffs and reduced immigration on corporate profits,” Schulze said.