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Insight from GuideStone on the Impact of the Election

Updated: November 11, 2016

By David S. Spika, CFA , Global Investment Strategist

David SpikaIn a surprise result not predicted by the polls, similar to the unexpected Brexit vote, Donald Trump has won the election to become the 45th President of the United States. In addition to a newly elected Republican president, the Republican Party retained control of both houses of Congress as well. This gives significant control to one party and increases the odds for major policies to be approved over the next two years, including the ability to fill at least one Supreme Court vacancy.

In light of these results, the financial markets are likely to be volatile over the near term, and potentially for months, as investors digest the surprise vote and begin to try and factor in possible outcomes of the Republican sweep. Ultimately, if the policies promised during the campaign are approved over the next year or so, the U.S. economy is likely to experience better economic growth than what was expected prior to the election; however, much uncertainty remains regarding how Mr. Trump will govern. Market volatility may also lead the Fed to postpone its planned December rate hike, and it is unclear at this point how the markets would react to such a move.

Specific policies that are now on the table include personal income tax cuts, corporate tax reform (including lower statutory tax rates as well as a reduction or elimination in the tax currently imposed on foreign-sourced profits), higher defense spending and a reduction in the regulatory burdens currently imposed on companies in the financial services and energy sectors. In addition, the repeal or modification of the Affordable Care Act is also very possible. While all of these policies have the potential to be additive to U.S. economic growth over the next few years, there may be concerns among members of Congress about the impact they could have on the budget deficit and national debt, so nothing is guaranteed.

On the negative side, an issue the Trump campaign has put at the forefront throughout the election is the elimination/renegotiation of existing trade pacts (e.g., NAFTA), as well as the imposition of new tariffs and quotas on our foreign trading partners, specifically China and Mexico. Mr. Trump believes such actions will improve the U.S. trade deficit while encouraging greater growth of industry in the U.S. versus the relocation of plants and factories abroad. He will have broad authority to impose tariffs and quotas without the approval of Congress; however, if we impose trade restrictions on our trading partners, they are likely to do the same to us, which could result in a potential trade war. Given that more than 40 percent of the earnings of S&P 500® companies are derived from outside the U.S., such actions could have a negative impact on U.S. economic growth and corporate earnings.

Other concerns that will likely cause market volatility include the potential for heightened geopolitical risk, given that Mr. Trump has been vocal about being more proactive with regard to world events, as well as the fear that his inexperience as a political leader may lead him to make mistakes early in his presidency.

Historically, the stock market has performed the best when Republicans control the White House and both branches of Congress, as seen in the graph below (Source: Strategas Research Partners).  So, the election results could be favorable for longer-term equity performance despite the volatility that is probable over the near term.

 

As we all begin to process the potential impact of the election, GuideStone believes long-term investors should not overreact to the election results, but should stay committed to their long-term asset allocation strategy. Past history shows that initial market reactions to an election outcome are not necessarily predictive of where markets are heading over the next year. Being patient worked well following the volatility that occurred after the Brexit vote, as well as during the market sell-off earlier this year. In fact, now may well be a good buying opportunity for investors who have been sitting on the sidelines waiting for a better opportunity.

Thanks for your confidence in GuideStone. We continue to work hard every day to earn your trust and will keep you updated as we learn more.