The unexpected happened, as Donald Trump was elected president. Whenever something unexpected happens, there will be an impact on financial markets.
Generally speaking unexpected events are a negative for the stock market. That is because surprises tend to bring a heightened sense of uncertainty, which is normally bad for the stock market.
In this past election Clinton was the status quo candidate, who did not advocate major changes from current policy. If Clinton was elected, and given the fact that she was the favorite, there would not likely have been a major impact on financial markets.
The expectation of Trump winning the presidency was considered similar to Britain leaving the European Union. Both events were considered to be unlikely, and if they occurred would create a level of uncertainty.
When Britain voted to leave the European Union there was a significant decline in global financial markets. However, markets did recover afterwards, as expectations started to shift that the impact on the global economy would not be too significant.
On election night, as it became more likely that Trump was going to win, stock markets that were open in Asia started to decline significantly. Futures on the U.S. exchanges were also down sharply.
When the U.S. market opened the day after the election, stocks were down only modestly. By the end of the day the stock market actually finished in positive territory.
This was certainly a major surprise for most investors.
One reason that the stock market did better than anticipated initially was that certain industries would benefit from a Trump presidency. Drug and bank stocks were up sharply, largely on the expectation that the regulatory environment would become more favorable for them. There were industries where stock prices did decline, but the strong performers more than offset the weaker industries.
There was also a significant rise in interest rates right after the election. Ten-year Treasury yields, which had been below 2% in recent months, climbed above 2%. This implies that mortgage rates will start to rise.
A key reason for the increase in interest rates is that expectations for a Trump presidency would imply a more expansionary fiscal policy. That is government spending would likely rise with more money spent on infrastructure projects, plus taxes would likely be cut.
Foreign and trade policy remain big question marks with a Trump presidency. Trump has spoken about redoing NAFTA, which could certainly work to the detriment of our relations with Canada and Mexico. Our local area has a large immigrant population plus many jobs in our region involve foreign trade, so there is some possibility of a negative impact to our local economy.
Energy prices will likely be somewhat lower under a Trump presidency than they would be otherwise. Allowing more oil and gas drilling increases supply, which tends to lower prices. Of course California has its own environmental standards, so electricity and gasoline prices will likely continue to be somewhat higher here versus the rest of the country.
One thing that investors should keep in mind is not to let their personal opinion of a President impact one’s investment decisions. There are many things that impact financial markets besides what a president does.
The initial reaction to a Trump presidency has been surprisingly positive. Tax and regulatory policy will likely be more positive for business and the stock market versus what might have transpired in a Clinton presidency. Trade policy remains a question mark, but hopefully competent advisors and Congress will help to prevent Trump from making bad policy choices in that area.
On balance it is too early to tell how a Trump presidency might be for financial markets. The stock market is currently at a relatively high level, so large gains from here are not realistic, though the stock market could do reasonably well during a Trump presidency. For now it is premature for investors to be making substantive changes based on what might occur in the upcoming administration.
