What to do now:
- Breathe.
- Understand and recognize the five stages of grief if your candidate didn’t win: denial, anger, bargaining, depression and acceptance
- Learn and understand how this will impact you 10 minutes, 10 days, 10 months and 10 years from now
Things will be very fluid in the coming weeks, but below is the current lens I’m looking through in response to last night’s win for Trump. Professionally, I take an agnostic view when making projections on the future economic and market climate. My mission is to connect you with your financial lifestyle. The political environment in which we live is not entirely in our control and shouldn’t impact your financial well-being. There is some concern that a Trump presidency will change this, but to react now isn’t prudent. It’s emotional, and not part of an overall plan.
How markets should respond
Policy change -> Economic/Social change -> Earnings change -> Stock valuation change.
Policy change -> Economic/Social change -> Inflation/credit risk -> Bond valuation change
Speculation today is at a granular level but the current theme related to markets is a laissez-faire approach to business. Biotech stocks rallied on potential of removal of price controls. Hospitals and insurers are down on concern of a repeal of Obamacare. Coal and other fossil fuel related companies will not be as constrained. Tax incentives for renewable energy will not be supported. Gun stocks are down as fear of a rush of sales is removed. Inflation is expected to ramp up with more infrastructure spending and trade policy. No one knows yet how this ultimately plays out. The fact is, no new policy has been made or repealed since last night. As the Trump administration is formed and his first 100 days are examined, more will be learned about the potential impact on future valuations.
The forecast for forecasting
It’s not that economic and political forecasters have been wrong, but they should be reviewed with more skepticism. Just because a model shows a low probability of something happening doesn’t mean it will not happen. Our initial reaction is binary, either good or bad. Yet the reality of the change is more complicated. Forecasts of the mortgage crisis in 2008, Brexit, and a Trump victory were wrong. Every vote counts. Every detail matters. The populist movement was underappreciated and could potentially upend our traditional methods of process and change. A Trump Administration could be run similar to building an empire, creating its own narrative rather than relying on fact-based, establishment-driven models. This is either scary or effective, depending on your personal political view.
Anti-globalism sentiment
The US trade relations with China, the EU, and other nations will be affected. The tone of the campaign was one of tearing up these agreements altogether, yet early on a President-Elect Trump has toned down this to a message of unification and working together. The Trans Pacific Partnership will most likely die in Congress. Shorter term, this results in more difficult negotiations with our trade partners and a potential for those countries to work around the US. Longer term, the potential for a stronger US with its partners will be balanced with higher material and labor costs against more employment for US workers.
How the investment management business will look going forward
I believe active investment management will outperform passive, at least for the short term. Dispersion of risk will occur as the playing field is re-evaluated. Traditional management and prediction models will not be as effective in this new paradigm. Established names with large moats in their industry could be threatened. As well, the regulatory environment for delivering investment advice will change. The Department of Labor’s April 2017 establishment of a fiduciary standard and possible follow through from the SEC is not looking good as a Republican Congress and White House have an easier chance of throwing out this rule. Regardless, as a Certified Financial PlannerTM I’m held to a duty of care and loyalty to always act in the best interest of my clients.
The bottom line
As more is learned about the economic impact Trump Administration will have, assumptions will be updated. At this point, I believe it has the likelihood for either positive or negative impact on the US and global economy which ultimately impacts investment returns. At the same time, this administration also takes on the enormous weight of the status quo. Regardless who our President is, Trump may not have much impact at all during his time in office. Future return expectations for bonds and stocks have dropped steadily since 2008. Perhaps this will reverse, but for now it’s too soon to tell. Sticking to your plan, now more than ever, continues to be the best path.
Bud Heintz, CFP®
