With the inauguration of Donald Trump as President of the United States, uncertainty now reigns. Given the policy and institutional ambiguity that a Trump administration presents, there are sure to be fireworks in the months ahead. We should focus our attention on the team Trump puts together as Congress confirms them, along with the foreign leaders with whom he meets during the first months of the new administration.
An uncertainty has now replaced the anticipated gridlock expected with a Clinton victory, along with a divided legislature. However, some gridlock will likely remain through the early months of the Trump administration, if not longer. We are waiting to see how this administration will define its policies and goals as stated after Trump’s inauguration. As this process takes place, we will see how receptive and cooperative Congress is to these policies and goals.
The markets have moved sharply upward since the election. We attribute this movement as an anticipation of a pro-business environment with a Republican administration and congress. Until the policies and goals are laid out, this may be merely speculative and optimistic.
Optimism typically impacts markets at the conclusion of an uncertain election. This post-election euphoria is often dampened when the complexity of passing legislation sets in. Equity markets and the U.S. dollar may suffer some early year pullbacks if their value is priced into the market because of post-election market optimism. If the new administration is slow to meet its pre-election promises, we will see market pullbacks and more frequent corrections. This means we shouldn’t be surprised if we see increased market volatility.
The fundamentals of the U.S. market still support a slow growth environment. Trump must begin the process of negotiating his agenda with Congress. His aspirations to increase fiscal spending on infrastructure and defense, lower both individual and corporate taxes, repeal many financial regulations and create more U.S. jobs. Along with changing or repealing trade agreements, these goals may be viewed as ambitious given the gridlock we have seen in Congress in past years.
Most of these items are good for equity markets. However, there is no guarantee that Trump and his staff can effectively move legislation through Congress, even with a Republican house and senate. From Inauguration Day forward, the growth-inducing promises that President Trump has made, and which helped equity markets surge to all-time highs, may evaporate if these policies don’t come to fruition.
While uncertainty and volatility in the market can make some investors uncomfortable, fundamentals like asset allocation, diversification, quality earning growth and valuations remain important tenants of any long-term investment plan. As always, it is important that you review your financial plan to reaffirm your individual goals and time horizons.