Much to the surprise of most political pundits and investors, yesterday the first man without any previous military or political experience was elected the 45th President of the United States. As we noted in last week’s Trade Update, the biggest shock to financial markets would be a victory by Republican Donald Trump. Sure enough, hours before the election outcome was finalized last night, there was a knee-jerk selloff in stocks overseas and in the futures markets, while gold rallied.
After initially sliding the maximum allowed, cooler heads prevailed as futures on the S&P 500 Index pared losses along with European stocks, while gold scaled back gains. Longer-maturity U.S. Treasuries sold off and copper soared to a 15-month high on speculation that President Trump will increase spending to spur economic growth. The Mexican peso fell to a record low amid concern U.S. trade policies will become more protectionist. It’s important to note that investors’ immediate reaction to U.S. Presidential elections often doesn’t last. In 7 of the last 13 presidential elections, the S&P 500 Index was higher 3 months later.
As the financial markets opened this morning in New York, speculation that President Trump will pursue more business-friendly policies has offset the fear of the unknown with the S&P 500 Index rising as a surge in health-care shares offset losses in consumer and technology companies. Long maturity (30 year) U.S. Treasuries sank on bets that President Trump will boost spending, while shorter-dated Treasury Notes rallied amid reduced bets on a Federal Reserve interest rate hike in December.
Financial markets generally don’t like one party to have complete control. However, the Republicans have been a market-friendly party and it looks like they will hold the House and Senate along with the Oval Office. Even though Trump’s trade and immigration policies are unconventional and his fiscal policy is a bit vague, he has spoken numerous times about his desire to increase government spending on infrastructure projects and reduce taxes (fiscal policy stimulus). This would be bullish for stocks and bearish for bonds.
In highly uncertain times, it is very important to keep things in perspective. Having a portfolio that is well-diversified containing non-correlated asset classes helps to minimize the principal 2 drawdown during periods of heightened volatility. Last week we reduced risk-based asset exposure in anticipation of a very close presidential election. Our clients’ international stock exposure is held in local currencies rather than hedged to the U.S. dollar. Bond duration, a measure of interest rate risk, is near benchmark levels. Gold, a hedge against inflation and a non-correlated asset class to stocks and bonds, is a core holding in all portfolios.
In conclusion, we do not believe that geopolitical events, such as yesterday’s U.S. elections, are long-term determinants of economic growth and financial market returns.
Andrew C. Zimmerman - Chief Investment Strategist, DT Investment Partners
Note: DT Investment Partners’ commentary discusses general developments, financial events in the news and broad investment principles. It is provided for information purposes only. The material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Investments in various asset classes entail different investment risks. For example, small cap equities tend to be more volatile than large or mid-cap equities. International equities and emerging markets have exposure to currency fluctuations, foreign taxes, political instability and the possibility for illiquid markets. Fixed income investments involve interest rate and credit risks among others. Real estate investing includes risks such as declines in value of real estate, changing economic conditions, tax laws or property taxes. Commodities’ investing is highly volatile and subject to changing economic conditions and the vagaries of speculators among other risks. Further, diversification and strategic or tactical allocation do not assure profit or protect against loss in declining markets. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results.