The victory for Donald Trump in the US presidential election appeared highly improbable only a couple of weeks ago; but it was always expected to create uncertainty and short-term volatility in markets. An initial ‘risk-off’ reaction was the likely result; bigger questions, such as over trade relations and fiscal policy, will be answered at a much slower pace.
In the meantime, it is important that investors sit tight and remember that such short-term fluctuations are an inevitable feature of markets, and do not alter the fundamental need for individuals to save and invest for their future.
Undeniably, Trump represented the ‘change candidate’; but regardless of the result, it is important to remember that the economic powers of the president are limited. Once in power, most presidents tack towards the centre. The reality is that major changes to the US economy have not corresponded with political shifts and there is little historic evidence that the US economy performs better under any particular political hue. The relationship between growth and who sits in the Oval Office is tenuous at best.
After an initial shock, markets may reflect that the checks and balances of the US political system will somewhat limit the new president’s freedom of action. Those who fear Donald Trump’s anti-trade stance will doubtless be reassured that even a Republican-controlled Congress is unlikely to simply rubber-stamp any extreme protectionist policies, not least because the Republican Party has always favoured free trade. Moreover, the uncertainty created by the result may stay the hand of the Federal Reserve in raising rates, which should boost equity markets; should the dollar lose value on a sustained basis, it would also act as a cushion. The 10-week wait until Inauguration Day provides a further chance for initial fears to subside.
Trump will inherit a growing US economy that has recovered well from the financial crisis and is fundamentally strong, with corporate earnings on an improving trajectory. This should continue to give support to long-term investors. Uncertainties lie ahead but markets have dealt with similar recent concerns and volatility, such as in the aftermath of the Brexit vote, and reached new highs. Indeed, given the similar shock with which the result was received, the UK’s Brexit vote could even provide something like a road map over the next few months.
The reality of a Trump administration will only be known in time, but the key principles of investing still hold true, whatever the election outcome. Individuals should continue to put in place long-term plans for their financial future and not be distracted by short-term events. Skilled investment managers are best-placed to make the decisions that can help protect investments against a range of risks – political or otherwise.
Copyright St. James's Place Wealth Management 2016