As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win. FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success. The mood among Republican operatives, even the candidate himself, was despondent. No candidate in modern electoral history who polled so badly post Labor Day had ever won.
And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM. Clinton holds a 100K lead in the popular vote, which may flip in favor of Trump as states finalize vote tallies. The final electoral count will be 320 Trump to 218 Clinton. Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.
Clinton was the policy wonk to the end, but could not overcome three instances of bad judgement:
- Using a private email server for State Department business
- Allowing the Clinton Foundation to solicit gifts from foreign governments while Secretary of State
- Accepting 6 figure speaking fees from Wall Street banks
The optics were horrible, shifting 1-2% of voters in critical states and delivering Florida, Pennsylvania, Wisconsin, Michigan and New Hampshire to Trump at the buzzer.
World markets reacted poorly at first, but recovered about half of initial losses. European markets are down 0.6-1.5%, while Asian markets are down 2.2-5.4%. S&P 500 futures fell 5% on the initial news, but are now down 1.2% (as of 8 AM EST.) When did we last see a similar reaction? June 24th, 2016 - just after the UK Brexit vote. Note that the S&P 500 made record highs one month later.
We received e-mails from distraught clients overnight, and we're calling those clients back as quickly as possible. Our message is simple: the stock market reacts primarily to revenues, earnings and interest rates. Corporations don't change their strategy based on one piece of bad news. Today, Amazon will ship millions of product orders, Pfizer will research pharmaceuticals and GE will build turbines. That was true after Brexit, after the 2008-9 financial crisis, after the 9/11 attacks. The latest economic reports showed the US unemployment rate at the lowest level in 8 years at 4.9%, while economic growth was firm at 2.9%. Earnings turned positive for the first time in a year and a half. Interest rates will rise by 0.25% to 0.5%.
A brief recap of our expectations of a Trump presidency:
- Termination of estate taxes
- Income tax rate slashed on high earners
- Termination of Obamacare
- Substantial boost in deficit spending, leading to a doubling of the national debt
- Roll back of the Department of Labor fiduciary standard of care for small investors
- Dismemberment of the Consumer Financial Protection Bureau
The doubling of the national debt holds some risk to our clients (lower taxes feels good, but increased debt raises interest rates.) Higher rates affect the bond portion of their investments more than the stock allocation. Firms like ours operate under the fiduciary standard established in the 1940 Investment Advisers Act, so no change for our clients. Americans who are less well off than our clients may suffer without the protections offered by the DOL and CFPB, and may lose their health insurance as well. Ironically, these Americans were most likely to vote for Trump.
The unknown unknown is whether Trump bumbles us into a shooting war with, for example, China. A low risk, but not a zero risk.
What to do about current holdings? The knee-jerk reaction is to sell now, buy back later "when the situation looks better." That strategy is a prescription for "selling low, buying high." We didn't sell after 9/11 or after Brexit. During the financial crisis, we sold mostly banks and financial institutions that we didn't think would survive. We don't believe any of the companies in our portfolios face survival risk right now. Our intent is to NOT sell anything today, certainly not in taxable accounts (locking in gains triggers capital gains taxes that can't be recovered when stocks move to new highs.)
One client who has worked with us since 2002 wrote, "Buy into hysteria! Wherever possible, please take advantage of this buying opportunity." Good perspective.