November 10, 2016
You are about to enter another dimension, a dimension not only of sight and sound but of mind. A journey into a wondrous land of imagination. Next stop, the Twilight Zone! -Rod Serling
Wondrous? Only time will tell. Half our nation may have already allowed their imaginations to roam in this direction when they woke up the morning after Election Night 2016, while the other half of the voting public may have struggled to steady itself from the nightmare they experienced that disrupted their intended peaceful night’s rest.
What is reality is that Tuesday night’s unexpected outcome has given the Republican Party control over both the White House and Congress, for at least the next two years. The Clinton-Bush-Obama era is now officially over, and change is upon us.
It is important to note that a key underlying factor in this “change movement” has been created by the widening gap across America between the haves & the have-nots and the shrinking of the middle class. Hard working citizens from across the country have felt like they are invisible when governmental policies are formulated and they are squeezed by the rising cost of health, education, and everyday living expenses. Although efforts to address nationwide financial literacy have made some inroads, deficiencies in education and comprehension of key concepts still exist, compounding the financial problems being experienced by many in our country.
A large percentage of the population has materially inadequate emergency cash reserves and retirement savings that contribute to an increased sense of vulnerability. Post-election analysis suggests that these factors contributed to shifting voting preferences of some within the traditional Democratic demographic base and impacted the election results. This trend needs to be taken into serious consideration in future elections and in determining policy going forward.
Donald Trump’s campaign rhetoric played to this need for change, energizing his key base support, but his comments also alienated many at home, along our borders and abroad, and within his own party. The detractors saw his rhetoric rekindling racial fears and lacking policy specifics. These concerns, along with the pre-election polling results that proved to be almost unanimously shockingly inaccurate, helped to explain the fears that triggered the initial global selloff in the markets that peaked somewhere close to Cinderella’s bewitching hour on election night.
The market generally does not like when either party has control over every branch of the government. History shows that incumbent leaders will often use the limited time available to them to overreach, seeking to accomplish too many initiatives that ultimately prove not to be in our country’s best interest. While some of the best years for the markets have come when we have had consolidated control, the same can be said for some of our worst years, adding to the uncertainty of what the future holds.
It will be interesting to see if the fractured relations within the Republican Party, and the long tenured belief that compromise is a four-letter word, can translate into a working coalition that actually benefits our country.
The initial selloff saw a limited follow thru the next morning and the S&P500 rose steadily throughout the day to close near session highs. Thursday may see yet another reversal, and it is not unreasonable to assume that the equity markets will display increased volatility for weeks and months to come, as the celebratory or “drowning of sorry” hangovers abate and investors try to decipher what a Trump administration will actually prioritize as its targeted initiatives.
President-Elect Trump ran his campaign emphasizing that he was from outside the dysfunctional political community in Washington and promised to build a coalition to get things done. He now has been given the opportunity to fulfill that promise, but may experience the common adage of being careful of what you ask for. There is a great deal of uncertainty about who the other key members of his Cabinet will be, and how he will build a consensus for crafting the transformative policies he has promised to deliver.
Immigration, tax law changes, foreign trade, Supreme Court nominations, and Obamacare reform or repeal, are all destined to part of the Trump agenda, but I believe that initiatives to stimulate economic growth may be the easiest policy items to get passed within the first 100 days of the new administration.
Investing in the country’s infrastructure has long been ignored, and with bipartisan support seeming to exist, it is a no-brainer to be part of his platform. Coupling this with the possible easing of regulatory and compliance pressures currently encumbering a number of key sectors of the economy, you could have a foundation for renewed job growth.
These positives could be offset, however, by rising interest rates – not necessarily by actions of the Federal Reserve, but from within the fixed income markets, if it perceives that tax cuts and increased spending will cause the nation’s budget deficit to increase in excess of any growth benefits realized by our economy. The increased spending could also trigger inflationary pressures that would push interest rates higher.
Many of our investment decisions were put on hold pending the results of the election. We now know who will lead our country for the next four years, but until many of these uncertainties are addressed and some successes start to be realized, there will continue to be concern within the equity and fixed income markets. In the meantime, we expect this uneasiness will definitely increase the range and frequency of volatility and market risk.
When normal patterns of sight and sound are compromised, it can cause one’s mind to play tricks on them. The lack of clarity and increased uncertainty about what will happen in the coming months may seem like we are operating in a surreal environment within the Twilight Zone.
Preventative measures should be initiated to minimize hyperventilating and control hallucinations as to how “Great America Will Become” or about the negative impact of failed policies. Investors should stick with an investment plan that is appropriate for their specific financial planning roadmap, and emphasizes risk mitigation techniques wherever possible.
Buckle up – it’s going to be an interesting few years.