With the US election results now behind us, many economic forecasters have been using their crystal balls to figure out what Trumponomics would mean to the US and the global economy. Prior to the election markets had a negative view of the proposed Trump economic policies, but views seem to have since changed. Most equity markets reached all-time highs and bond yields increased on the expectation that the proposed tax cuts and infrastructure spending would increase government debt, inflation and borrowing costs, while in the long term, these policies and deregulation would increase economic growth.
Only time will tell how much of Trump’s campaign propaganda will actually transpire despite the Republicans’ control in the Senate and House. What’s important to note is that the ‘globalization’ train has already left the station and is a long way down its track. Trying to reverse any of these trends through protectionist policies will likely be a difficult task. We believe any benefits from Trumponomics can be anticipated in 2018 at the earliest.
While economic expansion in the euro zone accelerated this year, an Italian constitutional-reform referendum causing a defeat for the current prime minister could further undermine Italy and the eurozone’s stability – this can be cause for more market volatility in the near term. The continuing weakness in oil and commodities in general, paired with the recent US dollar strengthening, has also weakened many of the Asian markets after a good ride since the beginning of 2016.
Our advice for investors
We’ll likely continue to see increased volatility in the markets until there’s more clarity on who is going to be part of the Trump administration and how Trumponomics will start taking shape. Markets have already accounted for an interest rate hike by the US Federal Reserve in December 2016. We believe this is just the beginning of the path to gradually higher yields after almost a decade of extremely low interest rates. Higher interest rates are signs of positive economic growth expectations, which ultimately bodes well for corporate profits.
While all the volatility plays out in the short-term, we think it’s worthwhile to step back, look at how different segments of the markets have performed over long periods of time, and understand the positive impact of holding a well-diversified portfolio.
As investors we can only control our own actions – defining our financial goals, saving regularly, sticking to a plan, and minimizing investment costs. Markets will likely face some heightened volatility in the short term. Rather than picking stocks and attempting to time the market, holding the right mix of asset class exposures (in accordance with your goals and objectives), rebalancing when required, and staying the course is the best approach. As they say, “Investing is a marathon, not a sprint.”