INVESTMENT DIRECTIONS

The post-election landscape

Nov 14, 2016 / By BlackRock

Implications of the election results for stocks and bonds around the globe.

 


It’s all over now, baby blue

The U.S. election is over (finally) and it will be remembered as one of the most divisive and unusual presidential races in American history. (Adding to the strangeness of the last few months, Bob Dylan won the Nobel Prize in Literature—hence our theme this month.) Still, Donald Trump’s unexpected election victory points to increased market and policy uncertainty ahead, at least in the short run.

The times they are a-changing

It is important to note that the underlying dynamics of this election were driven by widening income inequality and a growing perception that the benefits of trade and globalization have accrued to few. The new administration will have to address these issues and the resulting policies will have important implications for investors. Among those: A growing backlash against free trade and immigration threatens to make economies more insular—at a time when economic growth and productivity in many regions are barely above stall speed.

Don’t think twice, it’s all right

If history is any guide, election results have had a relatively minimal impact on longer-term U.S. or global equity returns. But policy shifts due to changes of government can ripple across sectors. Trump’s planned income tax cuts could initially boost consumer spending, but might soon lead to a deterioration in the U.S. budget and rising rates. Similarly, plans to deport undocumented immigrants could cause labor shortages and rising wages over time. This might lift inflation, leading to a faster pace of rate increases.

Tangled up in blue

However, it is important to note that the era of gridlock shows no signs of ending. Even though Republicans now maintain control of both the Senate and the House of Representatives, Trump may have to find common ground and compromise with Democrats—or the party leadership—to enact his legislative agenda.

Shelter from the storm

Still, there are some areas of consensus: Corporate tax reform and increased spending on infrastructure appear to have some bipartisan support. Health care stocks may continue to rebound on perceptions that a Trump administration would exert less pressure to lower drug prices. Perhaps the main implication is that we can return to focusing on fundamentals like growth, earnings or valuations—and central bank policy, which is arguably still the key factor driving stocks—for the time being.

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