For the second time in only a few months, a major voting decision has delivered an unexpected result. The victory of Donald Trump in the U.S. presidential election was largely unexpected and, following the old adage that “markets don’t like uncertainty,” may cause a global spike in volatility.
With the election cycle now complete, it is time to return our focus to underlying fundamentals.
For guidance regarding market moves, it may be useful to recollect several key conclusions following the British vote to exit the EU just five months ago in June.
- Things aren’t going to change right away. President-elect Trump will not take office until January 20, 2017.
- The world of realpolitik is quite different from the campaign trail. Many campaign promises will, in fact, need to run the gauntlet of the Congressional process of checks and balances.
- Expect policymakers, including the Federal Reserve, to rush to stabilize markets if there is a spike in volatility – a similar message that was sent by the Bank of England in the days following Brexit. Markets may move to price out a Fed rate hike in December, especially if financial market volatility is heightened.
There are large structural challenges that our economy faces, including a lower potential growth rate and chronically low interest rates, neither of which stood to be resolved by either candidate. That said, it is critical for investors to take a much-needed breather and look at how the economy is actually doing:
- GDP growth: While the U.S. economy’s pace of growth may feel lackluster, it is actually running near its full potential given the structural challenges I mentioned and based on the Federal Reserve’s own estimates for longer-run GDP growth of 1.7%–2.0%.1
- Consumer strength: We have an unemployment rate of 4.9% and have witnessed a series of steady job gains as of late.2 The consumer, which is the main engine driving this economy forward, looks healthy.
- Relative strength: Finally, the U.S. economy continues to outperform almost every developed economy in the world. It is still a large economy with growth opportunities for those knowing where to look.
We have written that the U.S. middle market is relatively more insulated from global economic forces than large, publicly traded companies. As witnessed in Britain following the Brexit vote, concerns about how policy changes could impact the economy tend to hamper business investment. Smaller, more domestically focused, private companies may offer shelter when market volatility increases.
Now more than ever, investors should stay tuned as the markets distill the news but, above all else, remain focused on their investment objectives and resist the human urge to make long-term portfolio decisions based on short-term market movements.
1 Federal Reserve Board, September 21, 2016.
2 Bureau of Labor Statistics Business Employment Dynamics Summary, November 9, 2016.
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