As we search for answers in the outcome of the US election, we need to look at the market focused items on Trump's agenda. These will be the drivers in the stock markets and could have a worldwide impact depending on how or if they are implemented.
It is important to remember a number of things, including:
Having a well diversified portfolio should continue to include an allocation to the US stock market. This should be maintained as a strategic long term allocation, not a short term tactical trade. Given the depth and breadth of the US market and the number of quality companies nothing should change in your overall outlook. Presidents come and go while these companies live on.
We speak about this time and again. The reason we do is because this is the foundation for your fund selection. It's a reflection of where you are at a point in time and that point in time helps determine what your investment mix should look like. A four year presidential term is not a deciding point when investing.
Trump supports "Frack now and Frack fast." He supports offshore drilling and exploration, as his goal is to be "totally independent of any need to import energy from the OPEC cartel or any nations hostile to US interests." Trump plans to achieve energy independence by 2022 by removing regulations on oil and gas companies and lifting moratoriums on energy production which would increase US shale production. Donald Trump has also said that he would reverse President Obama's rejection of the Keystone XL pipeline deal. However, he said that he would only reverse it after negotiating a better deal.
Looking at the oil market from a supply/demand dynamic, Trump's plan would likely increase supply, while not necessarily impacting demand, thus potentially having a negative impact on price. However, his policy to reduce regulation on the energy industry would improve the competitiveness of energy drillers and coal companies. This could help employment and profits in that sector. I suspect environmental issues will be placed on a back burner!
Bay Street analysts estimate that the Keystone XL pipeline would contribute approximately $4 billion per year for the Canadian economy.
Trump tax plan lowers the business tax rate from 35% to 15%. At 35%, the US has the third highest general top marginal corporate income tax rate in the world. The worldwide average top corporate income tax rate is 22.9%. According to his campaign, the current business rate is unattractive, preventing US companies from making domestic investments. The plan also includes a 10% tax on repatriation, which could bring trillions of dollars back into the US; American companies are holding $2.5 trillion abroad, which has increased 20 percent over the past two years. This is equivalent to nearly 14 percent of the total US GDP.
Trump's plan is targeted at stimulating the economy. His plan assumes that companies and individuals would use tax savings to invest back into the economy. Under the plan, the tax cuts should lead to stronger economic growth if corporations and households spend their excess income. This may lead to an increase in sales growth and will likely add to the bottom line of US corporations.
Trade will be an important driver of economic growth along with other key structural reforms. It is not within the President's power to impose new tariffs; however, the President could change pre-existing tariffs if certain conditions are met. The President through the US Treasury and the Commerce Department might have a free hand in cases where industries are allegedly suffering 'market disruptions'. For example, President Bush in 2002 imposed tariffs on steel imports in order to protect the industry. The WTO ruled those tariffs were in violation of the WTO Treaty and allowed Europe to impose tariffs. In the end, President Bush decided to end the tariffs but by that time, he had given the US steel Industry roughly 5 years to adjust. Ultimately, imposing a tariff will be sanctioned 'illegal' by some Trade Organizations - however, if the softwood lumber issue is an example, these disputes can spend years in court while tariffs are imposed.
Trump's plan will be to ensure that all US trade agreements increase the GDP growth rate, reduce the trade deficit, and strengthen the domestic manufacturing base. He plans to stop the Trans-Pacific Partnership (countries within TPP account for 40 percent of global economic output) at almost any cost.
He also plans to renegotiate the North American Free-Trade Agreement ("NAFTA") as he believes it is harmful to American workers. US manufacturing has actually increased tremendously since NAFTA, as the US produces approximately 60% more than it did before the deal came into effect. As well, Canada, Mexico and the US have become increasingly more intertwined over the years. For example, 35% of US exports go to Canada and Mexico. His plan has a clear focus on protectionism and hopefully he will focus his sights on China and other fronts.
In general we believe markets may experience higher volatility given the uncertainty of the Trump proposed policies. If the Obama presidency is any indication however, a President's ability to implement policy can be influenced by the willingness for compromise or lack thereof between him, Congress and the Senate. Trump has an advantage as all three parties are Republican although some have said they don't agree with his position on many issues.
Overall, basing investment decisions on geopolitical or political issues has historically resulted in poor outcomes.
Following this presidential election, we should remind ourselves that portfolio returns will ultimately be driven by a company's economic fundamentals and valuations and not presidential hopes and dreams.
A rise in interest rates typically causes bond prices to fall. The yield earned by a fund will vary with changes in interest rates and related bond durations. There is a concern the US Federal Reserve will increase rates, or additional borrowing by the US government to cover deficits caused by lower business and personal taxes will push rates even higher. This could negatively impact standard bond portfolios.
Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund's investments. This risk has always existed, whether this variability will become more pronounced is quite unknown.
Not the time to invest with emotions
While initial reactions to the election may be emotionally charged, we have always advocated the best and most consistent approach is to value the professional management of the funds we recommend. Let those managers do what they do best by making the most informed investment decisions.
Regardless of how offensive some of Trump's remarks may have been on gender, immigration or religious fronts, these subjects don't have a direct market consequence and have not been considered in these economic remarks.
I hope this update was helpful. Please feel free to forward to others. Always know we are here to answer your questions and to meet with you as you require.