WHAT’S HAPPENING POST ELECTION?
First there was Brexit. Then, Donald Trump surpassed the required 270 electoral college votes needed to become the next President-Elect of the United States. Next will be an upcoming election in France, that will likely be between François Fillon, a centre-right republican, and a far-right leader of the National Front, Marine Le Pen, who advocates for a French exit from the European Union. These events may not necessarily share much in common other than the anti-establishment movement that is sweeping through Western Democracies, and their global impact on financial markets.
US equity markets rallied on news of Trump’s victory. Many of the major indices went on to set new record highs. US treasuries, an attractive asset class when uncertainties about risky assets are high, have tumbled since the election results, which has pushed yields higher. Treasury yields rise as prices fall. Yields have risen in response to expectations for more inflation and growth under the newly elected Republican Congress and President.
The President-Elect has called for greater spending on infrastructure and defense, a 15% corporate tax rate (currently at 35%, the highest rate among OECD countries), and has promised to protect Medicare and Social Security. Other Republicans may have less aggressive ideas. Speaker of the House, Paul Ryan, proposed a 20% corporate tax rate. Chairman of the House Ways and Means Committee, Kevin Brady, said that any tax reform must pay for itself. If Mr. Trump does deliver on his pledges, estimates for publicly held federal debt relative to GDP range from 105% to 111% by 2026. The current ratio now hovers around 76%.
A potential revival of government stimulus through tax reform and capital spending initiatives, and recent regulatory roll back rhetoric by President-Elect is raising the risk that the US economy could overheat. That scenario makes it more likely that the Federal Reserve Bank is going to act soon with an interest rate increase. In any event, the center of focus has shifted to the economy’s potential to produce more nominal growth, and global markets have responded.
Emerging markets sold-off after the election. The prospect for lower tax rates could encourage American firms to repatriate overseas profits, that would leave less funds available for reinvestment in foreign markets. The value of the U.S. dollar strengthened on the heels of rising treasury yields. The combination of both a stronger dollar and higher interest rates makes it more difficult for foreign companies who borrow in dollars to expand production. American appetites for imports could rise with a stronger dollar, but that is going to depend on whether the Executive Branch is going to be soft or hard on free trade policies.
OPEC just recently reached a deal to cut 1.2 million barrels a day. In response, Brent Crude Oil prices ended the month of November higher from their open. Rising oil prices are being viewed as a boon for future global growth. Banks will free up capital for new investment as allowances for bad debt shrink with rising oil prices. Large investment projects are also likely to begin on projections that oil prices will continue to go up.
Gold futures for December delivery were down from their open in November. Many thought gold futures would rise on a surprise Trump win given the uncertainty he poised to the economy. Copper futures for December delivery also ended up higher. Anticipations for an American infrastructure boom, and speculation that Chinese consumption may be on the rise lifted the commodity to new highs.
Market Movers
US equity markets went on to set new heights after the announcement that Donald Trump would become the 45th President of the United States of America. The other major asset categories retreated as interest rates rose and uncertainties about American protectionism gained traction once the President-Elect is finally able to take office. The US dollar strengthened given the recent rise in interest rates, and on greater expectations that Federal Reserve is near a decision to raise its target for short-term interest rates. Our Core Allocation portfolios were generally flat during the month of November; strong US stock returns were countered with declining prices in almost every other financial market. Higher-risk strategies slightly outperformed the lower-risk allocations. The Core portfolios continue to outperform both the Morningstar World Allocation and Tactical Allocation category averages since the beginning of the year.
