November 2016 Newsletter
What a Trump Presidency May Mean for the Financial Markets
Originally, I wanted my first-ever Monthly Newsletter to come out at the very beginning of this month, but November 2016 was different – and you can probably guess why. I felt it was important to wait until after the presidential election to share my thoughts, knowing the results were going to have implications for the economy and the financial markets. So, what are those implications now that we know Donald Trump will be the President?
Well, basically, I believe this “Age of Economic Uncertainty” (as I call it) just became even more uncertain. Remember, the markets favor predictability and fear unpredictability, and so far, nothing related to Trump has been predictable, including his election. Now that he is in office, I see a clear dichotomy between what should logically happen with the financial markets, and what could happen from an emotional standpoint.
Logically, having an experienced businessman in the Oval Office should be good for the financial markets and enable them to stave off another major sustained market plunge longer than a Clinton presidency might have. But, emotionally, there are many Americans worried about this particular businessman running the country. If this worry continues, it could lead to a scenario that might actually cause the next major market plunge. This would be the third such plunge of our current long-term secular bear market cycle, which, according to my analysis of market history, is already overdue.
The Businessman Factor
Let’s consider the logical possibilities more closely. The first thing you have to understand is that Trump (whether you love him or hate him) is really a master politician, and in this campaign, he clearly “out-politicked” his opponents. He knew exactly what he had to say to get elected, and he said it. But like any politician, he’s a chameleon, and his colors are likely to change once he takes office. We’ve already seen indications of this in his first week as President-Elect, which suggests he likely won’t be taking some of the more radical economic measures he talked about that investors feared. With that in mind, one could argue that President Trump (as opposed to Candidate Trump) may serve to keep the next crash at bay longer because his true colors are those of a businessman. I’ve often said that, economically, the country needs to be run like a business. If it is, and if Trump makes good on some of his campaign promises while modifying or abandoning others, it could end up being a good thing for the markets and economic growth.
For example, some people were concerned about his protectionist policies during the campaign, but economically, those policies really aren’t bad. Basically, they amount to taking steps to ensure that we put our own country’s products and businesses ahead of foreign companies and imports. That would be a good thing economically, as would his vows to overhaul Obamacare, the Dodd-Frank Act, and the Corporate Tax Rate, which currently drive some American companies overseas.
In addition, with the markets today so responsive to artificial influences, it might be good to have a businessman in office whose very name is associated with high-end value and success. Why? Well, consider Trump’s real estate empire, which consists largely of properties he doesn’t own but that net him tens of millions of dollars because they bear his name. He’s created such a high-end brand association with “Trump” that it, alone, could increase the economic value of our stock market. We’re already considered “the cleanest dirty shirt in the hamper” among global investors, and the idea that Trump might bring his “Midas touch” to our stock market could make us appear even cleaner.
We also know Trump isn’t afraid of debt. This raised concerns among some about him possibly increasing our national debt, and it could be that our debt will continue to increase at the same rate under Trump as it has under Obama. But, as a businessman, Trump also understands that if debt is managed properly it can be turned into growth. I think the odds of that trade-off are better under him than they would have been under Clinton. Yes, it’s possible we could see our national debt double in the next six years (as it has in the last six), but instead of an accompanying GDP rate of barely 1 percent, we could see one of 3 or 4 percent instead.
The Emotional Factor
So, while the markets were at first rocked by Trump’s election, they rallied more quickly than they did after the Brexit vote. Dow Jones Industrial Average futures were down 800 points initially, but closed the day up 250 points, and the 10-Year Treasury rate jumped from 1.82 to 2.07 percent. By Thursday after the election, the Dow closed at a new record high of 18,807,* and within a week, the 10-Year rose to 2.30 percent. To me, this suggests Trump’s less radical post-election remarks led investors to conclude he may actually be a pro-market President and good for the economy.
While all of that seems logical, we also have to consider the emotional possibilities. Remember, the financial market is an emotional place, and we haven’t seen a presidential race this emotional or divisive in our lifetime. It’s important to remember that about half of the country is still vigorously opposed to a Donald Trump presidency. While this huge portion of the population may not move to Canada in protest, as some have vowed, they could start pulling their money out of the stock market in fear and mistrust of the new President.
If that happens, all the logical theories about Trump’s ability to grow the economy and add value to the stock market could be undercut by the reality of a massive sell-off. That could trigger “waves of capitulation,” as they’re known, in which progressively larger investors relent and feed into the downturn, ultimately creating that third major drop. As I’ve explained before, based on market history and the magnitude of our two previous drops (2000 to 2003 and 2007 to 2009), this could be a plunge of 30 percent at minimum, and could possibly be as steep as 70 percent.
So, for everyday investors, it’s important to consider the potential impact of both scenarios on your portfolio. If you’re younger, you might be okay with betting on the logical possibility: that a businessman in the White House will continue to hold off the next major market plunge and possibly even lead to more market growth. But, if you’re retired or within ten years of retirement, you have to consider whether the potential benefits of that scenario are worthwhile compared to the potential damage of the other scenario. In other words, is it worth gambling to increase your retirement savings by 10 or 20 percent if it means risking a loss of 30 to 70 percent? Think of it like walking into a casino and finding a game that paid you $10 if you won, but cost you $70 if you lost. Would you play?
*“Week in Review: Stock Market Jumps After Election.” Tulsa World, Nov. 13, 2016
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Pacific Financial Planners, LLC. is an Independent Registered Investment Advisor. Securities offered through Western International Securities, Inc., headquartered in Pasadena CA. Pacific Financial Planners, LLC. and Western International Securities, Inc. are separate and unaffiliated. The material contained within are the opinions of Jerry Slusiewicz only and are neither an offer or recommendation to buy or sell any securities or strategies mentioned. You should always check with your professional financial advisor and/or tax advisor before taking any action on any of the securities or strategies contained on this site.
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