Joe Barbieri
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The Markets November 2016 A.T. (After Trump)

The behaviour of the markets before Donald Trump was elected as President of the United States of America is vastly different compared to after the election result.

Before the election, the following expectations were in place:

Bonds were in a low to zero interest rate environment prior to Donald Trump being elected. The belief was that even though rate hikes were discussed for 2 years by the Federal Reserve, not much has happened and not much will happen. Ultimate chaos was expected to happen in the equity markets due to the uncertainty that a Trump Presidency would bring compared to a relatively stable, predictable Clinton Presidency. Gold and silver were shoe-ins to hit multi-year highs of $1400 per ounce (USD) and $25 per ounce (USD) respectively. The US Dollar was expected to tank as world leaders would not endorse Trump and money would flee the US to places like Europe and gold.

After Donald Trump was elected we find:

Bond yields are accelerating because the talk is that Trump will spend a lot of money on infrastructure and allow inflation to accelerate. Markets actually rose the next day after Trump was elected not just in the US, but around the world as well. Sectors that were down like energy, pharmaceuticals, infrastructure and financials were up strongly after the Trump election victory. The reason for this is that Trump is believed to reduce regulation and create a lot of future business. With respect to gold and silver, after the initial highs, both metals are down significantly. The US dollar is stable and is trading slightly stronger.

What is happening here? Pollsters and the media had not predicted a Trump victory, let alone a landslide in the three areas of government (President, Senate and House). What happened to all of the fears that were present before the election? Does the market know after one day or one week what Trump is going to deliver? Do they see the landslide victory as positive because all of the houses will support him? The higher inflation expectations reflected in the bond market would lead to a large decline in bond prices which may be ugly. Why aren’t the equity markets factoring this in? Inflation is traditionally good for metals but they are down significantly. Inflation is presumed to happen with higher interest rates and more demand for goods. What is missing here? If the markets think inflation and higher interest rates are good – why wasn’t any of this priced in prior to the election? The expectation would have been that markets would go down significantly prior to an anticipated Clinton win, followed by a sharp rebound after the Trump win. The market focus has practically reversed on many key assumptions like interest rates and inflation. As an example, higher inflation is not good for business unless companies can pass on higher costs to consumers. Is that really easily achieved? If debt costs are going to rise, shouldn’t profitability be much lower for industries with higher debt? It will be very interesting to see how the markets react when President Trump is in office.