U.S. Election: What You Need to Know

What does Donald Trump’s victory mean for your wealth management goals?

Katie Nixon, Suzanne L. Shier, Northern Trust
November 9, 2016

SUMMARY

• As an "unknown unknown," Trump's election introduces a level of policy uncertainty. As a result, we may experience a period of heightened market volatility.
• Although Republicans hold the majority in Congress, President-elect Trump will have to spend his early days building bridges to gain support for his agenda.
• A prolonged period of market volatility and uncertainty may affect the Federal Reserve’s decision about whether to raise rates in December.

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U.S. ELECTION: WHAT YOU NEED TO KNOW

Overview

• Defying the betting odds and pollster predictions, Donald Trump has pulled off an improbable victory.
• Trump will enter the White House with an extremely low approval rating, and with a populace battered and bruised from a divisive campaign.
• Although the Republicans hold the majority in Congress, Trump will need to build broad support from his party in order to govern effectively.
• Trump’s presidency also brings an additional layer of risk, at least over both the near and intermediate terms: that of general policy uncertainty. He truly represents the “unknown unknown.”
• Global capital market reaction has been swift. Equity, fixed income and currency markets are displaying a definitive “risk off” sentiment, reflecting deep concerns with Trump’s stated policies. Similar to the post-Brexit market behavior, global risk assets are selling off, although bouncing from the extraordinarily depressed overnight levels. It is important for investors to remember that the post-Brexit market reaction was short lived and the markets may swiftly regain equilibrium from this post-election response as well.
• The populist message of this election is clear, and President-elect Trump and Congress will have to find some common ground to address the issues the election illuminated. This will take time.
• For investors: keep calm and carry on. Looking at history, we see little correlation between who sits in the White House and equity market returns. We do, however, recognize that this result is decidedly out of consensus and unexpected. We urge investors to keep a focus on the long term and avoid the urge to react to short-term news.

Market Base Case

• With a Trump victory, we expect only modest changes from our base case of channel constrained global growth, persistently low global inflation, an accommodative Federal Reserve and slow-growing corporate earnings. This is despite President-elect Trump’s platform of fiscal spending, regulatory reform and meaningful changes to our tax code.
• Significant fiscal spending, particularly when unmatched by cost savings, appears unlikely in the face of budgetary challenges and his unpopularity with many of the Republicans in Congress. Given the strong populist message being sent, we assume some fiscal stimulus will be agreed on in 2017. But implementation will take some time. Key areas of focus will be infrastructure and defense, although the magnitude is unknown.
• President-elect Trump will have to spend his early days building bridges both within his party as well as across the aisle to gain support for his agenda.
• Given his lack of policy experience and his stance as a Washington outsider, Trump represents a degree of uncertainty to the financial markets and we expect a period of increased volatility, which may affect the Federal Reserve’s decision about whether to raise rates later this year.

Equity Markets

• The equity markets did not price in a Trump victory, and will likely react with a period of heightened volatility and downward price action across global bourses.
• Trump’s isolationist stance will create a period of uncertainty for U.S. multinationals, and the uncertainty may be exacerbated by early immigration-related executive orders.
• Trump’s desire to reduce regulatory burdens and to lower corporate taxes may provide a modest counterbalance for companies.
• Bottom line is that a Trump presidency will likely result in a higher risk premium for equity assets over the near term.

Fixed Income Markets

• If the financial market fallout resulting from the Trump victory is sustained through the next several weeks, it is likely that the Fed will refrain from increasing interest rates in December.
• Trump’s vocal criticism of the Federal Reserve, and specifically of Fed Chair Janet Yellen, adds an additional layer of uncertainty into the fixed income market outlook.
• We expect an initial flight to quality for U.S. Treasuries, driving down yields. However the fixed income markets may have periodic negative reactions during Trump’s term. While the real-world manifestations of his policy initiatives are unknown, many of the programs he supports may result in higher U.S. debt and inflation.
• Whether the Trump victory impacts the Federal Reserve’s decision on interest rates next month will be a function of the global financial market volatility: a significant and prolonged period of heightened volatility may keep the Fed on hold.

Tax Proposal Summary

• The combination of the Republican wins in the White House, House of Representatives and Senate bodes well for tax reform, including the potential for repeal of the 3.8% net investment income tax and even the possible repeal of the gift, estate and generation-skipping transfer taxes.
• The Republican sweep is expected to materially impact the work of the Department of Treasury in rewriting the pending proposed regulations regarding the gift and estate tax valuation of family controlled business entities.
• Estimates of the revenue reductions associated with the Republican tax proposals vary widely. But the realities of persistent underemployment of workers who entered the work force or were displaced during the Great Recession, and the health and Social Security benefit costs of our aging population will continue to drive demand for tax revenue.

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