The American version of Brexit hit Tuesday November 8th 2016 as voters confounded pollsters and pundits by electing the brash, celebrity billion Donald Trump as the 45th President of the United States. Although Trump lost the popular vote, he was able to secure the necessary 270 Electoral votes by winning key swing states like Florida, North Carolina and Ohio as well as Democratic leaning states like Wisconsin and Pennsylvania. Republicans in Congress also held on to their majority status.
We’ll let the pundits analyze the political implications and focus on what a Trump presidency with a Republican House and Senate potentially means for the markets. The last time this happened was 1928 after all under President Herbert Hoover.
The first consideration is the Senate. Although Republicans control the Senate with 51 seats, they don’t hold a 60 vote majority and will still need bipartisan support to get legislation through Congress. Without 60 seats, the Senate minority could still block legislation.
Tax and regulation reform probably have the best chance for getting some traction under a Trump administration. Regulation reform can mostly be accomplished with executive orders by either undoing what President Obama has already enacted or by Trump creating his own executive orders. Trump has indicated that he will make this a top priority. The market sees this as a positive for corporate earnings and the market.
Second, tax reform probably has the next best chance of getting through Congress. In particular, it is thought significant revenue could be raised by repatriating the $2 Trillion dollars held overseas by US corporations. A special one-time tax rate 10% or so could be used to entice corporations to bring their money home to be “invested” and the US government could get the tax proceeds to fund Trump’s proposed $1 Trillion infrastructure plan. This is also considered a positive for earnings and the market.
After that, things get a little murky. No one is sure what Trump will do when it comes to trade policy. How will Mexico and China fare under Trump? Will he really slap a 35% tariff on imports and will Congress even support that move. Will this cause retaliation and spark a trade war? How will fiscal conservative Republicans react to adding to the US debt if Trump needs to issue $500 Billion in US bonds to fund his infrastructure projects?
What about the Fed? Trump has publicly stated that he isn’t a fan of Fed Chairwomen Janet Yellen and would replace her. Does that mean he’s going to ask for her resignation or wait until her term ends in 2018? How would the market react to such a move? One of the expected consequences of a Trump plan is a stronger dollar. If you restrict trade and immigration, repatriated corporate dollars and start building more infrastructure the dollar will get stronger and inflation will rise. All of these would be considered negative for the market.
Clearly, there are more questions than answers about what is going to happen. However, we may see positive results over the next two years for investors if we can avoid a trade war longer term. Right now, only one of our three models is still negative. If the last one turns positive, we’ll have the all clear sign to start investing again. When that happens, you’ll be the first to know.