This US presidential election has been unique in many ways. From an investment perspective it is very singular because not only the result is uncertain, but also how the market would respond to the victory of any of the two candidates.
Probably this unpredictability is the result of this election being very thin in terms of programmatic content, and rather highly centered instead on the polarizing personalities and misdeeds of the two main candidates. A Trump victory would be an enigma, as we do not know much beyond the wall he intends to build in the Mexican border, and that he will try to repeal some major pieces of regulation like Obamacare and Dodd-Frank. Clinton on the other side has cultivated a presidential image and carefully tiptoed around core topics in the liberal agenda, such as healthcare and Wall Street reform. Hence, there is a significant risk of Trump turning out to be a more pragmatic president than the market expected, and Clinton a more radical one, particularly if the Democrats secure the Senate and/or the Congress.
However, despite the uncertainty, I would try to outline some probable investment implications for the main asset classes. This is easier done at micro rather than at macro level, and needs of differentiating between the short and long run.
Fixed Income
Starting with the macro, it is unavoidable to think on how a Clinton or Trump victory will affect interest rates. A Clinton victory will be benign, as it will be seen as a continuation of Obama’s economic policies, at least in the short term. On the contrary, if Trump wins, interest rates will probably increase, not the least because he has openly stated that he would like to replace Yanet Yellen, and discontinue the current ultra-loose monetary policy. In the long-run however, the two candidates are advocating an increase in fiscal expenditures – Hillary via more entitlements and Trump via tax cuts – as well as a large investment in infrastructure. Economic textbooks tell us that unless a virtuous cycle takes place, this fiscal largesse will result in higher financing costs and inflation, which will cause interest rates to increase. In summary, the difference between the two candidates will be the amplitude and not the direction of the movement. This means that this election will probably mark the end of the bond rally in the US, being its timing a question of for how long the Fed remains on the side of investors.
Currencies
If US interest rates have not being normalized further, it has to a large degree been due to the sharp appreciation experienced by the USD since the Fed announced its intentions. This brings us to the currency market. In the short term, if Clinton wins the USD may tend to appreciate, as has been illustrated by how the market reacted after the FBI exonerated her for a second time. On the other hand, as investors seem to be pricing a high probability of a Clinton victory, if Trump finally wins, the market will have to recalibrate and a sharp correction may occur. Here the reference to what happened after the Brexit is unavoidable. In the long run however, the key will be what happens with interest rates and inflation. If interest rates rise faster than inflation, this will be supportive for the dollar, and vice-versa. As we believe that we will still live in a deflationary world, we think it is more likely that the dollar will appreciate over the long run, independently of who wins the election.
Equities
Concerning equities, it is relatively safe to make calls at sector level, particularly if Hillary were to win. Usually, a democratic president has not been supportive of highly-regulated sectors like pharma, financials and energy, whilst it has been positive for technology and healthcare. Republicans on the contrary have tended to be supportive of the former, as well as positive for defense and energy. However, Trump is a discordant note in the Republican Party, and has for example promised to tackle drug price abuse. Moreover, if the US were to pull out from the NATO as he has suggested, this would not be positive for defense stocks.
Regarding the reaction of the broad equity market, similar to what happens in the currency market, it is rather a question of the expectations that are built. If as it appears to happen, the market is currently pricing a Clinton victory, if she wins there will be a short relief rally, whilst if Trump wins we may experience a sharp correction, as the uncertainty around his presidency is much bigger. In the long run, it is impossible to say who will result better for equity markets without revealing one’s ideology. Stock prices crucially depend on corporate profits and these ultimately on the performance of the economy. Whether tax cuts and less regulation will do better than a large government and more intervention is besides the scope of this letter.
And what if there is no winner?
The biggest short-term risk however is if there is a dead heat, with vote recount in some states and accusations of manipulation (Trump is claiming that the elections are rigged and has left unanswered whether he will concede a Clinton victory). This would be something similar to what happened in the 2000 elections, but given the current political climate, could lead this time to a prolonged legal and political battle that will trigger a risk-off event. As a consequence, stocks and credit will fall sharply, gold and heaven currencies will rally, and the US dollar and the US Treasuries will probably depart ways, with the former sinking and the latter stable or rising slightly.
Fernando de Frutos, MWM Chief Investment Officer
* This document is for information purposes only and does not constitute, and may not be construed as, a recommendation, offer or solicitation to buy or sell any securities and/or assets mentioned herein. Nor may the information contained herein be considered as definitive, because it is subject to unforeseeable changes and amendments.
Past performance does not guarantee future performance, and none of the information is intended to suggest that any of the returns set forth herein will be obtained in the future.
The fact that BCM can provide information regarding the status, development, evaluation, etc. in relation to markets or specific assets cannot be construed as a commitment or guarantee of performance; and BCM does not assume any liability for the performance of these assets or markets.
Data on investment stocks, their yields and other characteristics are based on or derived from information from reliable sources, which are generally available to the general public, and do not represent a commitment, warranty or liability of BCM.