Potential policy shifts could impact financial markets
The most expensive election in history is over. Markets celebrated by sending equities and crypto currencies roaring higher, bond prices lower, and the greenback soaring. Is this an indication of good things to come for stocks and the economy?
The one question on the election front remains whether soon-to-be-president Donald Trump will have engineered a ‘red sweep’. It may take several more days or even weeks to know that for sure, but right now Republicans will control the White House, the Senate, and already enjoy a conservative-friendly Supreme Court.
The stock market is betting on a sweep. So far, it had correctly predicted Donald Trump the winner, even though the polls had the contest at a dead heat. The betting markets were also correct. If the House does go to the GOP, investors should prepare for some far-reaching changes in the investment mix based on policy changes promised by the future president.
Indications are that unlike his first four years as president, this time around, Trump is prepared to begin those changes from day one. He will bring with him an almost entirely new team. We already know that implementing his first two objectives, immigration and tariffs, will not need congressional support.
Economists and market analysts alike worry that reducing the number of immigrants in this country, while levying sky high tariffs on our trading partners, would be inflationary. As a result, traders have been rushing into areas such as small cap stocks and cyclical companies that derive most of their business from the U.S. They have been selling China, emerging markets, marijuana stocks, and solar energy companies.
I would not join the chase in bidding up those areas. Let me give you some counter arguments. Let’s say all those terrible tariff threats turn out to be negotiating tactics. He could implement them for a month or so and then change his mind. Take the 100% Chinese tariffs, for example.
Trump has a better relationship with Chinese head of state, Xi Jinping, than Biden ever did. Who better to cut a deal with the world’s second largest economy than the man who started all the China bashing eight years ago. Tariffs on some products could be jettisoned as Trump claims victory on concessions. It has happened before and could happen again.
As for immigration deportation, throughout our history, Americans from time to time have blamed all their woes on immigrants. We are doing that now and Trump knows that. I suspect he will do what he needs to do to satisfy our lust for punishing immigrants. He could very well round up a bunch of felons and throw them out of the country. It would freak out potential illegal immigrants, make a great show on nightly news and that would be that. End of story.
There are some areas however, where regardless of what the new president does, we could still see further gains. Crypto currencies, I believe, will continue to climb. It is clear to me that the long winter of government policy on crypto is over. New rules and regulations will make crypto “a safe bet” in the future for many, in my opinion.
Nothing that I see within Trump’s agenda will reduce the deficit unless he can grow the economy faster than we are spending money. It is possible. He promised to spend more than $8 trillion in tax cuts and new programs. If his programs fall short then progress on the inflation rate could reverse. If so, hard assets and precious metals will shine, especially if the Fed continues to ease.
The FOMC met this week and once again cut interest rates by 25 basis points. Investors cheered the move. Equities rallied in response. The election results have unleashed a wave of animal spirits in the stock market. All the three main indexes reached new record highs. Even the Russell 2000 small cap index joined the party.
I had urged readers not to make any moves in their portfolios before the elections and this week proved why. If you had bailed in fear, you missed several percentage points of gains as a result. November is usually the second-best month of the year, but seasonality was wrong in both September and October this year. It is worth noting, but it is only one variable in a basket of items I look at.
On November 13th, we will see the release of October’s Consumer Price Index. It could show a minor increase in inflation, which may not be what the market is expecting. If so, it could cause some volatility. My next piece of advice is not to allow your political persuasions to dictate your next moves in the market. Stay invested, buy the dips, and be prepared for a pretty good December.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at billiams1948@gmail.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.