Trump Victory Reinforces Conservative Stance
Wednesday, November 09, 2016
Investors reacted very negatively to the unexpected Trump victory. At the time of writing, the futures markets were indicating that U.S. stocks would be down roughly 2-3% this morning. Overseas, European and Asian stocks were down significantly, led by a more than 5% decline in Japanese equities. The price of oil and other commodities dropped too, as did commodity-related currencies like the Canadian dollar. The Mexican Peso fell more than 9% to its weakest level on record.
Unfortunately, it’s tough to argue that investors are being irrational. The Trump win could have “real” fundamental economic consequences, at least in the near term. The uncertainty associated with the Trump presidency and his policies will likely have a negative influence on business sentiment. At the margin, businesses will likely delay spending plans and hold back on hiring. Consumers might also cut back on spending in the near term with markets discounting tougher times. We are not suggesting a recession is imminent, but growth will likely be slower than it would have been had Hillary Clinton won. Longer term, Trump’s ideas on trade and immigration are worrisome, as increased protectionism will undermine global growth.
Still, we caution investors from fearing the worst. Trump will likely be forced to moderate his positions on many fronts, given that the president doesn’t have much autonomous power and needs to work with Congress to get things done. In other words, what Trump said to get elected and what he does or is able to do will likely be very different. Indeed, markets were recovering from their worst levels as Trump talked about bringing the country together during his acceptance speech.
Trump is a businessman and there is a good chance that he will surround himself with smart advisors. He has a big ego and is driven to succeed. It’s probable that he will ultimately want to support policies that will be good for the economy and the stock market. Nonetheless, it will take time for investors' fears to fade.
Due to our concerns regarding debt, social unrest and political dysfunction, we have purposefully emphasized higher-quality businesses and an under-weight position in cyclical sectors. That posture should continue to serve investors well.
Investors who own high-quality businesses should be well equipped to endure tougher times and thrive over the long term. The unexpected Trump victory reinforces our conservative stance.