Investors initially reacted to president-elect Donald Trump’s surprising win and are now beginning to think through the likely impact a Trump administration might have on markets and the U.S. and global economies. We are apt to see heightened uncertainty and elevated downside risk as markets continue to digest the reality of his presidency and the White House transition of power begins to solidify his short- and long-term political agenda.
So what could all this mean for investors? The reality is that it is too early to know for certain. With both houses of Congress now under Republican control, the Trump administration may have greater success implementing legislation than the intense partisan roadblocks of the past several years. However, it will be difficult to deliver on Mr. Trump’s promise to stimulate economic and employment growth while simultaneously reducing deficit spending. It is also unclear how the broad-sweeping changes he has suggested might collectively play out. His plans around tax reform could see higher bond yields, a stronger U.S. dollar and lower gold prices but with a rising budget deficit and falling real yields. His commitment to higher infrastructure spending could benefit the industrials sector but also implies higher levels of U.S. Treasury issuance, which could further pressure yields. Planned trade barriers to make domestic companies more competitive could hurt exporters, weigh on the U.S. dollar and push gold prices higher, while more accommodative industry regulatory policies could prove positive for financial services, health care and energy stocks.
Of course, the gulf between campaign promises and actual action can be wide, so we believe a wait-and-see approach seems like the best course for the time being. Although there may be opportunistic tactical moves that could benefit from short-term volatility, a more prudent path may be for advisors to reach out to investors and confirm that current portfolio holdings continue to align with their long-term goals. We will continue to look for attractive buying and selling opportunities with market moves, but we believe financial markets ultimately tend to reflect long-term fundamentals and encourage investors to frame their investment holdings with this mindset in the weeks ahead.
Thoughts from our portfolio managers below:
Ronald Schwartz, CFA
Managing Director, Senior Portfolio Manager, Seix Investment Advisors LLC
Senior Portfolio Manager, RidgeWorth Seix Tax-Exempt Funds
Director, Municipal Research, Seix Investment Advisors LLC
The Trump election is clearly a potential paradigm shift for the U.S. economy and asset markets, and until there is greater clarity surrounding budget and policy priorities in the coming weeks and months, market volatility will likely remain high. At this point, we believe the election impact on the municipal market will surround three key policies: tax reform, repeal of the Affordable Care Act (ACA), and an increase in domestic infrastructure spending.
Tax reform will likely be one of the main public policy issues in 2017, as both President-Elect Trump and House Speaker Ryan have repeatedly called for a lower and simpler tax code. The Trump tax policy plan is to lower the corporate rate to 15% and the highest personal income rate to 25%, while Ryan’s plan would lower the corporate rate to 20% and highest personal rate to 33%. Either tax policy, if enacted, could reduce overall demand for tax exempt bonds.
It is important to remember that over 75% of the country’s infrastructure has historically been funded by municipal bonds, which will remain a strong headwind against any tax reform that negatively impacts the value of tax exemption going forward.
President-elect Trump envisions a $1.0 trillion infrastructure plan over 10 years that will be funded through deficit neutral tax credits for equity investment in infrastructure projects supplemented by federal subsidized loans. Overall, the anticipated increase in infrastructure funding is good for economic growth and public finance credit quality. Trump’s proposal is not likely to increase the amount of municipal bond supply as the focus is on tax credits for private companies.
Repeal of ACA is Negative for Hospital Bonds
Republicans are committed to “repealing and replacing” ACA and we believe the election is highly likely to have a negative effect on the tax exempt hospital sector. Since the election, we have seen hospital credit spreads widen out significantly as repealing or scaling back ACA would reduce revenues for hospitals. We have an underweight recommendation to the hospital sector and we expect the $250 billion in hospital debt to continue to underperform over the near and medium term.
For a more detailed synopsis of the election and municipal bonds, read our monthly muni perspective.
Managing Director, Head of Leveraged Finance, Seix Investment Advisors LLC
Senior Portfolio Manager, RidgeWorth Seix Floating Rate High Income Fund
While the election results were certainly a surprise, we believe our portfolios are positioned well to benefit from an administration that will likely look to reduce the regulatory burden on businesses and provide more fiscal stimulus. The immediate impact in the markets thus far has been a rally in commodity prices, a stronger dollar, and higher interest rates. Importantly, both high yield bonds and leveraged loans have historically performed well in rising rate environments. It is obviously very early in the transition process and the political process of converting promises to law will take time to play out with many details still unknown. Seix’s time-tested bottom-up research process will continue to guide us as new leadership comes to Washington next year.
Chief Investment Officer, Ceredex Value Advisors LLC
Senior Portfolio Manager, RidgeWorth Large Cap Value Equity Fund
The Trump victory was certainly a surprise to the markets. A period of uncertainty is likely in store for the immediate future as and until Mr. Trump’s policy details are made known and the personnel responsible for such policy actions are named and appointed. Near term the markets will likely trade with higher correlation and heightened volatility as these details are sorted out. It’s too soon to be able to make significant portfolio shifts given this scarcity of information. This is a bigger deal with more potential consequences than the UK’s Brexit vote in our view so we desire and need to proceed forward with thoughtful prudence in our portfolio decision making. We like our current portfolios and feel confident that our positioning which focuses on company specific fundamentals rather than macro noise will serve us well during this period.
Director of Asset Allocation, RidgeWorth Investments
Portfolio Manager, RidgeWorth Allocation Strategy Funds
Investors watching the U.S. election returns were surprised and shocked by what was considered the least likely outcome: a Republican sweep of the White House, Senate and House. A Clinton win and a Democratic majority in the Senate were seen as the most likely scenario, and investors had positioned themselves accordingly. So, not surprisingly, equity futures sold off aggressively as returns reflected the unexpected result, in what has been compared loosely to the market’s failure to call the Brexit vote correctly during the summer. This is not the first time the “smart money” has been off the mark in recent months and years; Brexit, Spanish elections, and Greek elections are all examples of the failure of analysts to gauge accurately voter priorities and preferences.
While many aspects of the upcoming Trump administration are unknown, some policy priorities are more likely than others and could move stock markets positively, but also increase market volatility while the process and details unfold. Many investors that have positioned themselves within sectors and industries anticipating a Clinton victory will likely neutralize these positions prompting an increase in near term market volatility. What is said on the campaign trail often differs from the political realities on the ground in the halls of Congress.
It is too early to put a sharp pencil to Trump policy specifics. Initiatives on healthcare, immigration, trade, and foreign policy will likely come into greater focus. However, we believe it likely that we will see a near term move to reduce taxes for a significant number of Americans, which would be positive for consumer spending. We also believe a consensus can be quickly reached to increase infrastructure spending along a number of fronts. We expect the net of these two initiatives will be positive for near term economic growth but will also put upward pressure on the federal deficit and in turn interest rates. That said, uncertainty during the transition period may keep Federal Open Market Committee (FOMC) policy on hold.
Importantly, the election should be viewed in the context of current economic conditions and prospects. Our outlook remains cautiously optimistic for the economy and the stock market. Job growth has been steady, and third quarter corporate earnings showed a positive turn following five consecutive declining quarters. We see the risk of recession as being low over the near term, and that fiscal stimulus moves have the potential to lift what has been a historically slow rate of economic growth. Indeed, such moves may be copied in some fashion to other sluggish regions such as the EU.
We do not anticipate a “sunshine and roses” economy in the coming year. Many secular factors are likely to continue to vex the economy. That said, we do not see a doomsday scenario for the economy or the markets based on the election outcome, as shocking as it was. We see an economy that has shown steady improvement over the course of 2016 that will likely receive a noticeable dose of economic stimulus as early as 2017. All of this could be positive for the equity markets.
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Any comments and general market related projections are based on information available at the time of writing, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information is subject to change without notice as market conditions change, and is not intended to predict the performance of any individual security, market sector, or RidgeWorth Fund. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. Past performance is not indicative of future results.
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