Decision 2016: Uncertainty and Long-Term Implications

Donald Trump’s election is the latest in a string of events showing popular discontent with current global political and economic models. We’ve seen this expressed in the Brexit vote and in concerns about immigration all across Europe. These local political reactions to global financial and economic conditions introduce a great deal of uncertainty into financial outcomes.

Even in the early hours after the election, you could see the markets trying to process this uncertainty. On election night, S&P 500® futures were down 5%, at the trading limit. In the next trading session, U.S. stocks ran up more than 1%.

We can highlight the uncertainty in a few ways. Among the potential economic benefits of a Trump presidency are lower taxes, less regulation, and greater fiscal spending on areas such as infrastructure. On the other hand, his campaign rhetoric suggests that renegotiating or canceling long-standing trade agreements is a possibility.

As we navigate through the uncertainty, we answer many top-of-mind questions below.

Q: What potential impacts could the Trump victory have on global markets?

A: There are several areas we will be watching closely, including international trade, commodities, and energy. Donald Trump’s campaign statements about renegotiating trade agreements imply potential protectionist policies that could inhibit free trade and set off trade wars that would weigh on internationally focused businesses. His stated intention to boost infrastructure spending could help certain commodities, such as copper. Promises to revive America’s coal industry and roll back regulations on coal and hydraulic fracturing should benefit coal and oil while pressuring natural gas.

Q: How could emerging markets be affected?

A: Emerging markets may be pressured in the near term, particularly Mexico and China, which were targeted in Trump campaign rhetoric, and which could be affected by new trade policies.

Q: What areas of the market could benefit from a Trump presidency?

A: It’s difficult to predict with certainty which sectors or securities would benefit. In given sectors there could be winners as well as losers. For example, within health care, pharmaceutical stocks may benefit now that Clinton’s reform plans are off the table. Conversely, hospital-related stocks may decline due to Trump’s stated intention to overhaul or repeal Obamacare. Elsewhere, stocks of financial services firms could benefit from less regulation. Defense-related stocks could get a boost from increased military and defense spending.

Q: What areas might be hurt by a Trump presidency?

A: The shares of U.S. automakers, which rely heavily on parts and vehicles made in Mexico, could be under pressure due to the potential for tariffs on cars shipped back across the border. Solar (alternative) energy stocks may be negatively impacted if Trump enacts legislation favorable to coal energy. Tech companies may decline due to concerns over trade and tariff wars.

Q: What factors caused U.S. Treasury yields to rise?

A: U.S. Treasury yields rose due to the anticipated one-two combination of continued accommodative monetary policy (interest rates remain very low) and increased fiscal spending, including infrastructure and defense spending. Fiscal spending ultimately has to be financed by the government, which means more bond issuance, which increases the bond supply. There’s also the prospect of lower personal income and corporate tax rates, which are intended (at least in theory) to boost personal and corporate spending. A possible side effect of potential increased spending, coupled with accommodative monetary policy, could be higher inflation. This also is being priced into the U.S. Treasury market, causing Treasury inflation-protected securities to outperform their traditional Treasury counterparts during the sudden November 9 sell-off.

Q: What is your longer-term view of U.S. Treasury yields?

A: Trump’s election may have simply accelerated a trend that was waiting to happen. Yields have been low for so long that a shift to more historically normal levels was becoming increasingly likely. This appeared to be particularly true in the U.S., but U.S. bond yields were constrained by global influences and concerns, including slow global economic growth, massive central bank monetary stimulus that produced negative interest rates overseas, and Brexit-related concerns. These factors haven’t gone away, and new ones (such as Italy’s coming constitutional referendum) keep appearing. Global inflation remains low, global growth remains slow, and these longer-term, fundamental factors aren’t likely to change quickly any time soon. These factors could continue to keep U.S. yields from rising much beyond this initial “knee-jerk” reaction.

Q: What is your Federal Reserve (Fed) policy outlook?

A: We believe the Fed wants to resume normalizing U.S. interest rates—U.S. central bank policy has been abnormally accommodative since 2008. This accommodation helped stabilize the global economy and capital markets, but the resulting historically low interest rates and massive bond purchases punished savers and rewarded risk-taking behavior. This increases the odds of financial market bubbles and other imbalances, including inflation.

We think the Fed believes it can help keep inflation contained by increasing interest rates now in small increments at a modest pace and avoid bigger, more concentrated and disruptive moves later. The odds of a December rate hike, as reflected in federal funds rate futures, declined in the immediate wake of Trump’s election only to rebound to pre-election levels. The odds stand at over 80% at the time this is being written.

Staying the Course

The impact of the election’s outcome will continue to play out in the weeks and months ahead. As always, American Century Investments’ portfolio managers remain committed to their disciplined investment processes as they monitor risks and seek out opportunities, regardless of market conditions.

Generally, as interest rates rise, bond values will decline. The opposite is true when interest rates decline.

The opinions expressed are those of G. David MacEwen and Victor Zhang and are no guarantee of the future performance of any American Century Investments portfolio.

For educational use only. This information is not intended to serve as investment advice.