The unexpected victory of Donald Trump has been a reminder of the growing dissatisfaction many Americans have with the political establishment of this country.  Even though we can look to history, which tells us elections and presidents don’t typically have a lasting impact on financial markets, many are questioning whether it will be different this time. While this moment of uncertainty may persist for longer than we would like, it is our view that the economy will continue to grow, corporate earnings growth will persist and global financial markets will allow us to uncover compelling opportunities to grow our client’s portfolios over time.

Over the last two years, investors’ nerves and stomachs have been tested several times when the stock market experienced a correction, and then recovered within a matter of weeks.  These moments have been a good reminder of just how much equity markets dislike uncertainty.  While even the most experienced investors find this kind of volatility unsettling, maintaining a long-term view and positioning portfolios to perform well in a variety of conditions is essential.  At Sand Hill, we pride ourselves on our commitment to maintaining diversified portfolios which help dampen volatility, provide the potential to benefit from positive market returns and protect against excessive risk.

As a result of the unexpected nature of their outcomes, comparisons between the US presidential election and Brexit are easy to make.  It is apparent that the rise of nationalism around the world, from Britain and across Europe, has washed up onto our shores as well.  However, the US election is much more important economically, politically and militarily than Brexit or other notable movements to date.  One unexpected outcome from last night’s election is the Republican sweep of both houses of Congress. This outcome will allow Congress to more easily implement policy without the gridlock that has existed for the last several years.  While politically many of those policies, without any natural checks and balances, may be unpalatable to many, for the time being, the markets are interpreting this outcome as pro-business rather than the doomsday scenario many predicted.  While having an unconventional president in office creates uncertainty, in the intermediate term we do not anticipate a structural weakening of our economy or an outcome that would be significant enough to derail the recovery in corporate earnings growth we are anticipating in 2017.

Trump’s campaign pledges focused on lowering taxes for both individuals and corporations, renegotiating trade treaties and stepping up fiscal spending, among other things.  While it is impossible to predict the financial market reaction of these pledges becoming policy, further economic stimulus in the form of tax cuts and fiscal spending could potentially result in stronger economic growth, along with a higher fiscal deficit, which could cause interest rates to move higher.  This could spur a sector rotation away from historically low volatility, high dividend paying sectors of the equity market such as consumer staples, utilities and REITs as their yield would become unattractive relative to yields in the fixed income market.  These are areas we have been moving away from this year given their lofty valuations and limited upside potential.  The financial market impact from strained foreign relations is hard to predict but one potential outcome could be lower demand for the US dollar which would serve to weaken our currency in the global marketplace.  This outcome would be a positive for export-driven US manufacturing businesses although, admittedly, it could be offset by a lower volume of international trade.

Of course, many of these campaign pledges may never come to pass. Trump’s tenuous relationship with House Speaker Paul Ryan, and their two very different philosophies on topics such as entitlement reform, could mean new tax legislation will be slow to materialize.  While many unknowns remain, we positioned portfolios conservatively leading into the election and have maintained a disciplined investment approach.  This has included opportunistically investing in out-of-favor asset classes, such as regional banks and commodities that should benefit from higher interest rates and industry-specific turnarounds, which we don’t expect to be significantly impacted by new initiatives in the White House.

As always, we want you to feel comfortable and are available should you have questions about your portfolio.  We plan to continue following a disciplined investment approach on your behalf by focusing on the underlying health of the global economy, maintaining and rebalancing diversified portfolios as circumstances evolve, and favoring areas that we feel have the most potential to add value to your portfolio.