President Trump - What Next for Markets?

Once again the pollsters and media have been proved wrong in 2016, which is turning out to be a year of geo-political surprises. Not only does Trump control the White House, but Republicans also control the Senate and Congress, making it easier for him to pass legislation.

Turbulence in financial markets calmed after a knee-jerk selloff in stocks and rally in safe haven assets as investors reassessed the effects of Trump's surprise victory. Markets had reacted overnight as if the four horsemen of the apocalypse just rode out of Trump Tower, with US and European stock futures and benchmarks in Asia sliding, but throughout the day markets stabilised and recovered. This does not mean that market reaction is over. Like Brexit, we will only know the consequences in the longer run.  

Although I acknowledge that there is a big difference between a politician's election promises and what transpires as official policy, Trump's election promises on tax issues include; lowering US corporate tax rates from 35% to 15%, collapsing the US's seven income tax brackets into just three tiers with a top rate of 33%, and eliminating estate tax. The cost of these tax cuts has been estimated at $5.3 trillion. The US budget deficit is already huge, and cutting taxes across the board will mean that the US takes on more debt making its deficit swell even further. Furthermore in his victory speech Trump alluded to a campaign of infrastructure investment, which, presumably, will be funded by increased Government spending. 

Given that the US is approaching full employment, and that Trump seems more concerned with stimulating growth rather than reducing deficits, this may increase wage inflation pressures (in particular in the US construction sector if the programme of infrastructure re-building is embarked upon). Increasing levels of government debt and continuing federal deficits naturally lead to higher interest rates. The Federal Reserve can postpone the natural effects of increasing government debt for some time by keeping interest rates artificially low, but this is a stopgap measure that cannot be sustained indefinitely. The end result of continuing deficits and increasing debt is most likely a severe devaluation of the U.S. dollar at some point in the future. No nation in history has ever been able to get away with the trick of just printing money out of thin air forever.

Trump has asserted that decades of free-trade policies have been responsible for the collapse of the American manufacturing industry and that these trade deals need to be re-negotiated. Trade deals that may be up for re-negotiation include the North American Free Trade Agreement (US, Canada & Mexico), Trans Pacific Partnership (12 countries around the Pacific Rim) and the Transatlantic Trade & Investment Partnership (US and Europe). Although much of Trump's pre-election rhetoric can be ignored, there is a tangible risk that a Trump presidency will fuel anti-globalisation and spark a wave of protectionist policies around the world. 

Given that we have had the second longest bull-run in history,  that interest rates are effectively 0% or as close as makes no difference, that governments have run up huge deficits, and that many investors may have been forced up the risk curve looking for yield, I think it wise that a balanced investment strategy has an allocation to unconstrained investment strategies such as 'absolute' or 'target return' funds.  Absolute return and unconstrained strategies seek to produce positive returns independent of market direction, provide good diversification across a range of asset classes, sectors, and geographies. They aim to provide a more predictable and less volatile route to generating returns than focusing solely on equities or property.

As always I would be delighted to answer any queries you may have and to help you in any way I can. Please don't hesitate to contact me. 

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Gavin Gilmore trading as Gilmore Insurance & Financial Services is regulated by the Central Bank of Ireland.
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