Commentary by Clark Wagner, President, Foresters Investment Management Company and Vice President and Chief Investment Officer, Foresters Financial
Tuesday’s general election resulted in a clean sweep: Republicans kept control of both houses of Congress, and Donald Trump took the White House.
The polls and the pundits failed to foresee Trump’s election. Markets, always wary of the uncertainties implicit in change and long fretful over Trump’s volatile nature, should face a period of uneasiness. The longer term direction of the markets will depend on what policies Trump chooses to pursue and the administration he forms.
His pro-growth policies -- fiscal stimulus, tax reform, and decreased regulation -- have the ability to move the economy forward. But protectionism -- building a tariff wall against imports generally and effectively declaring a trade war with China and Mexico -- could produce a recession. The U.S. stock market will, of course, react positively if pro-growth measures have the upper hand.
The outlook for interest rates is more nuanced. Both pro-growth and protectionism would be inflationary and lead to tighter monetary policy and higher interest rates. Tax-reform and fiscal stimulus would also lead to larger budget deficits and, in turn, higher interest rates. But a trade war risks global recession which would ultimately lead to lower interest rates. Meanwhile, the market continues to place a greater than 70% probability of a Federal Reserve rate hike in December, although it has dialed back expectations.
And then there is Congress. Although Republicans have kept control of both houses, Trump will face resistance to many of his policies, particularly those that investors fear most. The Democrats maintained enough seats in the Senate to filibuster legislation, and several powerful Republicans in both houses, Speaker of the House Paul Ryan among them, have expressed skepticism about many of Trump’s campaign proposals.
Following Great Britain’s unexpected Brexit result in June, the U.S. stock market fell 5% in two days, only to recover and rally almost 10% in the ensuing weeks. The point is, markets tend to be very volatile in the period immediately after a major event, especially an unforeseen event such as Trump’s election. These are generally not the most opportune times to make reactionary investment decisions. Over the next few weeks, we should get more clarity on what a Trump Presidency means for the country, and the markets. Hopefully, pro-growth policies will “trump” protectionist policies.
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