Wednesday, November 9th, 2016
Surprise, it’s a brave new world in the US. In a reprimand to the political establishment—and a surprise to many— President-elect Donald Trump rode a wave of populism to pull off a major upset. With somewhat greater clarity in Washington, we now are considering the degree to which campaign rhetoric will translate into policy and the effect that may have on the economy, financial markets, and importantly the Fed.
From Verger’s perspective, and for our portfolio, it’s more “Sound and fury, signifying nothing.” As you all know, we don’t try to time the market or make big bets on the future but suffice to say, the last 24 hours have been quite a roller coaster. Last night around midnight, the Dow futures were down 800 points, or 5%. On today’s open, US equities were roughly flat to marginally lower, with bonds also trading down. By mid-day, equity markets had rebounded and are roughly up 1%. As we sit right now, US equities are adding to Monday’s gains as if yesterday never happened. Not that bad, all things considered.
While gridlock can be good for markets, not all the Republicans are fully on board with the President-elect. Things will likely get done in Washington given the Republican sweep, however, what gets done and their broader impact to markets remain unknown for the moment. Corporate tax cuts (which should improve earnings), tax amnesty, infrastructure and “old” energy spending, a moratorium on new regulations, and a repeal of Obamacare are all in the cards for the early days of a Trump Presidency. Trade is the wildcard but all this spending will require funding. We are going to need tax reform to pay for all these initiatives, and a Democratic filibuster is clearly on the horizon. Infrastructure may be the low hanging fruit, and a rare instance where bipartisan support may be found.
Our biggest question is Dr. Yellen’s future; the Fed and her tenure will clearly be in the spotlight. The shorter end of the curve looks pretty stable and a December rate increase might be off the table now. We might even see some pressure from the White House for more QE to fund some of President-elect Trump’s growth initiatives. We know a few of the names being thrown around to help with the economy, names like Malpass, Minerd and Kudlow. There are still so many unknowns, but now is the time for Republicans to govern. Partisanship has been poisoned, and it will take time to heal. Near term volatility is going to continue.
The lesson we repeatedly learn at Verger is “Protect, Perform, Provide” continues to work and at the same time allow us to be ready for opportunity. Last night, many learned of the danger of consensus and the herd mentality. Democracy requires opposition to work effectively, markets don’t always go up and you have to be prepared that the next cycle won’t look like the last. The Portfolio continues to focus on being “anti-fragile”, let’s hope the country can grow in the same direction.
*The views expressed in this communication are the express views of Verger Capital Management, LLC