Post-Election Thoughts

As you are well aware, Donald Trump has been elected President of the US. It is still very, very early, but we wanted to update you on both the market reaction and our general positioning.

Market Reaction:

Domestic equities have been resilient. After being down 5% overnight, they had flipped positive by early morning on the hopes of expanded fiscal policy. For several years now, the consensus has been that fiscal policy needs to step up and pick up the slack in the economy. The Republican congress had blocked Obama from increasing spending at every opportunity, but this should change now that they have one of their own in the White House. Trump clearly has no issue spending, which should be inflationary and could be a tailwind for both the economy and equities. The impact to international equities is more ambiguous, as Trump has threatened quite a bit of trade protectionism.

Trump’s positions on monetary policy are a big unknown. He’s made a lot of conflicting statements, sometimes saying rates are being held artificially low and sometimes saying that raising rates would be a disaster. This is one of many contradictory statements, so it will be interesting to see how he actually governs. For instance, it remains to be seen whether he will stick to his campaign promise to replace Fed Chair Janet Yellen or opt to keep her in place.

A note on forecasting:

Like the Brexit vote, yesterday’s election is a good reminder to invest for every eventuality and not to invest based on projections or assumptions. Nobody can predict the future. Although a Clinton victory was our base case, we gave Trump about a 1/3 chance of winning (which was much higher than the consensus). One of our fund managers, Jeffrey Gundlach, at DoubleLine was emphatic that Trump would win. Sometimes our base case is right and sometimes it is wrong, but we will never invest only for likely scenarios. We are very serious about protecting portfolios against unexpected events.