Thoughts on the ElectionSubmitted by LongView Asset Management LLC on November 14th, 2016
November 9, 2016 – We would like to share with you some thoughts about last night’s election results and their implications for investors.
The election revealed deep dissatisfaction and stark divisions in the country. As individuals, we at LongView have concerns about the potential consequences of the election on social, environmental and other policy matters. Nevertheless, as fiduciaries and investment advisors, our primary focus is on your financial security and well-being and we will confine our comments below to issues related to investments.
Control of both Congress and the executive branch increases the likelihood that Republicans will be able to implement elements of their agenda, including lower taxes, increased military and infrastructure spending, and reduced regulation. A pro-business agenda may for now seem appealing to investors. Today’s market activity indicates that the beneficiaries will include industries such as financial services, healthcare and energy. Industrials such as defense companies rallied today (as did prison stocks), while solar stocks and other renewable energy sectors fell. Value judgements aside, the stock market took the election result in stride today, with the S&P 500 Index gaining +1.11%.
On the other hand, interest rates rose sharply. The yield on 10-year Treasury Bonds ended at 2.06%, an increase of almost 19% from last Friday. We remind you that higher yields are the byproduct of lower bond prices. Investors, in other words, were selling Treasuries, which is the opposite of a “flight to safety” that might have been expected. Why have yields gone up? One answer is that inflation rates could rise as a result of higher government spending and budget deficits (not to mention the threat of import tariffs). In such an environment, the Fed would likely raise rates later this year, as previously signaled. In tandem with the bond selloff, stock market sectors that are sensitive to interest rates, including REITs and utilities, fell today on these concerns.
Internationally, the picture is more mixed. Donald Trump has promised a protectionist policy that could undermine global growth. Today’s drop in the currencies of major trading partners Mexico and Canada reflects those concerns. Republican policy has traditionally been pro-trade, however, and it remains to be seen how much resistance the new Congress will put up to Trump fulfilling these campaign promises. In addition, the very real risk that these policies could tip the economy into recession is something that might give pause to Congress and President alike. Like the Brexit vote in Britain, the consequences of the US election on global markets are likely to play out over time.
We encourage you to focus on your long-term investment goals and not allow emotions to dictate short-term decisions. As we mentioned in our last quarterly letter, markets have historically been indifferent to which party occupies the Oval Office. The complex global tides affecting economic growth tend to have more impact. While the uncertainties surrounding a Trump presidency could keep market volatility high, the fundamental underpinnings of the US economy remain positive and corporate earnings going forward seem likely to improve.
Our portfolio positioning reflects expectations for continued growth, modestly rising interest rates and elevated nervousness. We will keep you posted as our thoughts evolve over the coming weeks and months.
David, Harlan and Mariah