What Does Trump Mean for Investments? by Adrian Day
The market reaction to Trump’s election victory—stocks and the dollar up, gold down—was the opposite of what had been widely foreseen. Money manager Adrian Day takes a look into what happened and why, and discusses the outlook going forward.
At the core of the market reaction are interest rates. Bonds declined sharply on the Trump victory. They had already been falling for the last several months, and the growing conviction of a rate increase in December stepped up the decline. Trump, with his grandiose spending and debt plans, only exacerbated that decline.
But that made U.S. yields attractive (relatively) to foreign investors, and yield overrode the negative sentiment globally towards Trump. Thus, foreign investors bought U.S. bonds, which drove the dollar up, and pushed gold down (aggravated by massive sales by well-known investors including George Soros, Carl Icahn and Stanley Druckenmiller.
A general distrust turns to specific positives
As for stocks, there had been a general negative attitude toward Trump, and somewhat positive toward Clinton, in the period leading up to the election, as evidenced by market moves after each debate, FBI statement and new poll. When it looked as though Trump might win, Asian stock markets duly sunk, along with Dow futures.
But once Trump was declared the winner in the middle of the night, the general shifted to the specific, and investors started looking at sectors that would be gainers and losers from a Trump presidency. And off of a sudden, there were more stocks that were winners that losers, led by banks and the financial sector (less regulation), base metals (infrastructure spending), oil drilling and drug companies. Given that these sectors had been depressed on fears of greater regulation under Clinton, the rebounds were sharp.
Likely outcomes in the period ahead
All of these moves are likely overdone in the immediate term. But if we look at a Trump administration, we will likely see:
- Increased spending, including on infrastructure and defense
- Tax cuts and less regulation
- Higher interest rates
- All in the context of continued easy money globally
This suggests a stronger dollar in the near term.
With regard to Yellen’s threat for a more “hawkish” Fed to counterbalance fiscal profligacy, we would retort, “I knew Paul Volker, and she’s no Paul Volker.” We do not expect sharply higher rates, and further out we will likely see higher U.S. debt (already high) and higher inflation (already stirring).