What Could Trump's Election Mean for the Markets and Economy?

By Christopher J. Wolfe, CFP® and CFA Chief Investment Officer, First Republic Private Wealth Management
November 9, 2016

With Donald Trump now elected as the next U.S. president, many investors are wondering what his term in office might mean for the markets and economy.

Trump’s surprise victory could potentially cause market volatility over the short term as investors digest the election’s outcome. But keep in mind that much of what happens with your investment portfolio over the next four years will hinge more on the global economy, interest rates and other macroeconomic factors.

That said, Trump’s policy plans — and his ability to carry out his agenda — could certainly affect market and investor behaviors to some degree. Here are some things we expect to happen with the market and economy in coming years:

Unpredictability Means Short-Term Volatility

Whenever the presidency changes party hands — in this case from a Democrat to a Republican — it means there’s an entirely new political agenda in the White House. Knowing that the status quo will be shaken naturally creates investor uncertainty.

Will President Trump try to dismantle the Affordable Care Act? Will he try to swiftly make big changes once in office?

Add to that the fact that Trump’s policy proposals are something of a black hole. During the campaign, his positions on issues ranging from immigration to taxes wavered, and he left many voters wondering what he actually believed and wanted to accomplish as president.

Given all of this uncertainty we can reasonably expect significant market volatility in coming months as investors wait to see what President Trump pursues in his first few months and year as president. However, we recommend, as with all market-moving surprises, that investors not sell assets in a panic. Rather, investors should use this time to review their allocation strategy and consider rebalancing their portfolio if the opportunity arises.

Immigration and Trade Positions May Disrupt Markets

Trump’s protectionist views on trade and hardline stance on illegal immigration have concerned many business leaders. Businesses generally benefit from open borders and free trade.

If Trump begins to pursue the plans he outlined during his campaign — such as ending major trade agreements like NAFTA and imposing high tariffs on foreign-made automobiles — it could take a toll on affected companies’ stock price. Because trade is such a big factor in so many large companies’ livelihood these days, any attempts to control it, hinder it or make it more expensive could lead to a more serious downturn.

On the other hand, Trump’s plan to reduce taxes on businesses and higher-income Americans could prove to be politically popular and help increase short-term business investment and employment.

Of course, this all depends on what Trump pursues as president and whether he can push his plans through Congress. While both chambers of Congress will be Republican-controlled, many Republicans have disagreed with Trump on major issues such as trade and immigration. So he may face resistance on certain agenda items and must persuade members of Congress to align with him, or he may have to compromise on his plans. Trump may also use his executive power to bypass Congress when he can.

History Suggests Stocks Could Outperform

Historic market data suggests that markets could perform well under Trump’s administration. While this doesn’t predict future performance, since 1953, the S&P 500 has returned an average 19 percent in years when the president was Republican and both chambers of Congress were Republican-controlled, according to data from Crandall, Pierce and Company. The total average annual return was 12 percent over that same period. Looking at more years of data paints a slightly different picture. According to Strategas Research Partners, since 1933, the average S&P return has been just over 15 percent, as represented in the chart below. 

The likely reason for that strong performance is that business leaders typically favor traditional Republican policies, such as lower taxes and less regulation. Having the presidency and Congress aligned also allows such policies to get swift approval.

But of course Trump isn’t your typical Republican president and he may face more challenges getting his policies through Congress than Republican presidents in the past.

partisan control

First-Year Bounce

A president’s first year in office tends to be good for the markets and economy. First, many companies cut back on capital spending ahead of presidential elections because of the uncertainty the election creates. That spending typically returns once the election is decided.

But new presidents also tend to push fiscal stimulus packages through Congress during their first year. On the campaign trail, Trump outlined a plan to spend $550 billion to rebuild the nation’s infrastructure, such as roads and bridges. That could certainly give a jolt to the U.S. economy, but many Republicans were critical of the plan when it was introduced, so it’s unclear whether they will embrace it now.

Maintaining Perspective

It’s impossible to know what the next four years will bring to the markets and economy, and Trump’s presidency is only one factor. But we can expect some market volatility as investors wait to see what President Trump plans to pursue once in office.

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©First Republic Investment Management 2016