2016 U.S. Presidential Election: A Brexit Redux
This post has been updated with the results of the 2016 US Presidential Election.
By any measure, this was an unusual and highly contentious election cycle with more twists and turns than an episode of ABC’s Scandal. And earlier this month, pollsters and media pundits alike were surprised when Donald Trump triumphed in the election. Despite the latest plot twist that Hillary Clinton was backing Green Party Jill Stein’s recount request, it does appear that in 2017, Donald J. Trump will become the 45th President of the United States.
“The reality is people are either thrilled or devastated. The market had priced in a Clinton victory and frankly they were flat wrong, as was the media,” Brittain Prigge, CFA Balentine’s Head of Relationship Management told InvestmentNews in the aftermath of the election.
There is no question about it. The US presidential election was indeed a Brexit redux. In a broader sense, this presidential election has been a microcosm of a much larger, global theme: politics are increasingly a place for the “haves” to wage war on the “have nots,” rather than a battleground for those aligned with the more traditional left and right political spectrum. Brexit highlighted a gross underestimation of voters’ desire for change, and this theme was carried through in the popularity of Mr. Trump’s campaign, which many dismissed as a farce right up until election night.
Despite futures plummeting in the early morning after the election, the market recovered before it opened on Wednesday morning. Markets reached new highs on “Black Friday,” a combination of strong sales and the inevitable relief rally that follows most presidential elections.
But what does it mean longer term? It has been especially difficult for capital markets to handicap the implications of a Trump presidency. His positions have been deliberately hazy and often contradictory, and he has surrounded himself with a team of advisers who emanate from outside the political mainstream. To add fuel to the fire, Donald Trump’s victory may lead to a sudden change in the direction of Federal Reserve policy. Central bank programs have dominated market movements since the Great Financial Crisis, and the Fed’s stance of driving interest rates down to unprecedented levels has helped propel stock markets higher with lower volatility. Deriding central bank actions as politically motivated, Mr. Trump has implied that he would consider appointing a more hawkish Federal Reserve chairperson when Mrs. Yellen’s term expires in 2018 (or even sooner). The Federal Reserve has strongly hinted it will raise interest rates in December, and markets are now rattled that there could be an unexpected change in the trajectory of this path.
Chief Investment Officer Adrian Cronje was one of several experts interviewed by the Atlanta Journal-Constitution’s Michael Kanell following the election results, sharing: “I know it’s trite to say so, but the markets do like certainty. What happens with the Federal Reserve and between Trump and the Fed, this is the thing that could rattle the markets the most.”
However, the idea that fiscal deficits might begin to expand next year, along with growing awareness that global central banks are reaching the limits of their effectiveness, are providing a tailwind behind rising interest rates. The yield on the 10-year Treasury bond has risen steadily since its low in the immediate aftermath of Brexit.
For stock markets to continue to progress as long-term interest rates rise, corporate America’s earnings base needs to grow again. Against a backdrop of uneven but steady economic growth, a stabilization in oil and other commodity prices, and a narrowing of corporate credit spreads, there are tentative signs that growth might be occurring, breaking the “profits recession” of the last several quarters.
As always, Balentine will keep a close eye on the impact of the presidential election on portfolios and stand ready to take advantage of investment opportunities as they arise.
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