The Markets Continue to Respond Favorably

The Markets Continue to Respond Favorably

Donald Trump’s election victory was a surprise to most. Just as unexpectedly, the markets reacted favorably. The markets hate uncertainty and, of the two candidates, Trump embodied the greatest unknown. Yet, despite this, the markets had a very good week. The S&P 500 gained 3.87%, the Dow Jones Industrial average added 5.52%, and the Russell 2000 jumped 10.27%. Both the dollar and bond yields rose. Depending on your perspective, yields either climbed because foreign investors reduced their US bond holdings out of fear, or expectations for positive economic growth improved. The only stocks that appear to be adversely affected were emerging market stocks, most likely due to the protectionist stance President-elect Trump has espoused.

To put the markets’ reaction into perspective, the day after the 2008 election in which President Obama beat Senator McCain, the S&P 500 lost 5.3%; after President Obama retained the White House in 2012, the S&P declined 2.4%. So, given the unknowns with this election’s winner, why have the markets responded favorably? The answer may be found in the market itself. For the week, the Financial and Healthcare sectors outpaced the rest of the market, both gaining over 6%. The rallies in these two sectors may be attributable to the fact that Clinton had proposed more regulations on banks and restrictions on pharmaceutical pricing. Trump is likely to be less restrictive on both sectors.

At the present, the markets expect Trump to be more positive than negative, with changes in taxes and regulations offsetting any negatives from potential protectionist trade policies. To that effect, on June 24th, the House Republicans agreed on a tax reform plan to lower corporate taxes and make the tax code “border adjustable.” The border adjustability will allow for changes in export and import costs through tax reform, which could mean imports are taxed but exports are not. Trump has endorsed this plan, so he may use border adjustability instead of tariffs to affect foreign trade. While still hurting growth, it should be less negative.

Tax reform and a repatriation tax holiday could bring in additional revenues which could be used to pay for the infrastructure spending Trump has planned. While the details of his plan have not been defined, the policy is generally pro-growth.

Although the initial market reaction has been favorable, risks remain; while we hope the anti-trade policies are not too disruptive, we’ll have to wait and see. As always, it is important to remain broadly diversified with particular attention paid to downside protection.

 

Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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