U.S. Elections: A Populist Victory (J.P. Morgan Market Bulletin)

The article below was published as a Market Bulletin on November 9th, 2016 by Dr. David Kelly, Chief Global Strategist with J.P. Morgan Asset Management. Click here to view a PDF of the original publication.  

U.S. elections: A populist victory

After a long and brutal U.S. Presidential election campaign, Donald Trump has emerged victorious, with Hillary Clinton conceding in the early hours of the morning, and Trump congratulating her on a hard-fought campaign. Importantly, the swing to the Republicans also saw the party retain control of the U.S. Senate. In a much easier-to-predict result, the Republicans retained a comfortable majority in the House of Representatives.

Trump’s victory was achieved by tapping into, and to some extent, stoking general voter discontent. While most of the campaign on both sides was negative, Trump’s populist messages of lower taxes, gun rights and a conservative religious agenda, allied with opposition to trade agreements and illegal immigration, were ultimately successful in knitting together a winning coalition.

Markets had been anticipating a Clinton win, which would have represented a continuation of the status quo. Trump’s victory, by contrast, has elevated global uncertainty, partly because of the danger of a trade war and partly because it is not clear which parts of a very ambitious agenda of tax cuts, increased defense and infrastructure spending and health care reform can, or will, be implemented. Global financial markets have reacted in predictable “risk-off” fashion, with global stock markets and oil prices falling, and gold and U.S. Treasuries rising. The Mexican peso has fallen, as has the U.S. dollar.

For investors, however, the question is not how markets have reacted, but what is the long-term outlook in the wake of the U.S. elections? A few key points need to be made:

First, the U.S. economy that President Trump will inherit is in pretty good shape. Real economic growth has picked up in recent months while the unemployment rate, at 4.9%, is close to any economist’s definition of full employment. S&P 500 earnings have rebounded smartly from the oil and dollar induced slump of 2015 and inflation is still moderate. Moreover, the global economy is also showing signs of life with the global manufacturing purchasing managers’ index hitting a two-year high in October. All of this, absent political uncertainty, would be positive for stocks and negative for bonds.

Second, the uncertainty and volatility following the U.S. election will, for now, reduce the probability of a Federal Reserve (Fed) rate hike in December, although the Fed will want to leave its options open until it can assess the market and economic fallout from the election result.

Third, while last night’s results represented a Republican sweep, actual policy change may be far less dramatic than was proposed by Trump during the campaign. First, it should be noted that there is a wide gulf between Trump’s agenda and that of many “establishment” Republicans and the latter may well balk at unfunded tax cuts or spending increases. In addition, both the new President and Congress will likely act more slowly on dismantling the Affordable Care Act or trade agreements, until some better alternatives can be found.

Finally, it should be noted that, as has been the case elsewhere in the world this year, voters have chosen change over caution and politicians tend to respond to what voters want rather than what they need. While the Trump agenda is unlikely to be implemented in full, members of Congress may be willing to go along with some proposals to increase spending, lower taxes, reduce illegal immigration and increase tariffs. If they do so, they may well further stoke inflation in an economy that is already heating up. Longer term, increasing government debt to fund these initiatives has obvious dangers.

The knee-jerk reaction of investors to last night’s election was to sell U.S. and global stocks and buy Treasury bonds. However, in the medium term, a warming economy, further stoked by expansionary fiscal policy, could favor the former over the latter.

In the long-run, investors would do well to make sure that they are well diversified outside of U.S. stocks and bonds and that they have sufficient exposure to alternatives and international securities. In light of the Brexit vote and the U.S. elections, 2016 has proven decisively that populism is a good political strategy— whether it proves to be good for long-term economic fortunes is another question entirely.

DISCLOSURE: The Market Insights program provides comprehensive data and commentary on global markets without reference to products. It is designed to help investors understand the financial markets and support their investment decision making (or process). The program explores the implications of economic data and changing market conditions for the referenced period and should not be taken as advice or recommendation.

The views contained herein are not to be taken as an advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other EU jurisdictions by JPMorgan Asset Management (Europe) S.à r.l.; in Hong Kong by JF Asset Management Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited; in India by JPMorgan Asset Management India Private Limited; in Singapore by JPMorgan Asset Management (Singapore) Limited, or JPMorgan Asset Management Real Assets (Singapore) Pte Ltd; in Taiwan by JPMorgan Asset Management (Taiwan) Limited; in Japan by JPMorgan Asset Management (Japan) Limited which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Korea by JPMorgan Asset Management (Korea) Company Limited; in Australia to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Cth) by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919); in Brazil by Banco J.P. Morgan S.A.; in Canada for institutional clients’ use only by JPMorgan Asset Management (Canada) Inc., and in the United States by JPMorgan Distribution Services Inc. and J.P. Morgan Institutional Investments, Inc., both members of FINRA/SIPC.; and J.P. Morgan Investment Management Inc.

In APAC, distribution is for Hong Kong, Taiwan, Japan and Singapore. For all other countries in APAC, to intended recipients only.

Copyright 2016 JPMorgan Chase & Co. All rights reserved.
MI-MB_Election Response_4Q16