The presidential-election result was a significant surprise to most of us, and to the markets. Late last night, S&P 500 futures (which trade overnight) were down five percent from yesterday’s close. Today, the market erased those losses and actually finished up one percent from yesterday’s close. Clearly, the market is unsettled about the consequences of a Trump presidency.
We expect continued market uncertainty and volatility in the months ahead. The outlook for much lower tax rates represents a significant but unpredictable shift in the federal budget and U.S. Treasury bond yields. The prospect of detaining and deporting large numbers of undocumented immigrants is nearly certain to fray market nerves. The uncertainty regarding our involvement in longstanding international organizations, including NATO, the IMF, and the World Bank, will cause worry. And concern that Mr. Trump may be partial to a less independent Federal Reserve may be destabilizing to markets.
While these and other concerns are all worthy of close attention, we believe they likely will not impact the multi-decade path of corporate fundamentals, which is ultimately responsible for the long-term path of stock prices.
However, Mr. Trump’s plans for our international trade agreements could have a more lasting impact. If trade relations were damaged or existing deals abandoned, there are two potential long-term and fundamental consequences for U.S. corporations: 1) less revenue growth, resulting from less trade with foreign partners; and 2) lower corporate profits, resulting from both lower revenue levels and greater labor costs. Currently, our expected return for U.S. stocks is little changed from yesterday, but the outlook for trade deals represent the long-term market risk we will be watching most closely.
There is also a series of important referendums and elections in Europe over the next year. According to (potentially understated) polls, the frustration across the Atlantic seems similar but even louder than that evidenced in our election, with stakes at least as large. We expect volatility to be a dominant part of our experience for some time.
Despite our worries, we firmly believe that the physics of corporate fundamentals will overwhelm all perceived and real worries in the long run. Even depressions are endured and wars fought, but good American businesses grow over time. It has been said that our fears are always more numerous than our dangers — a valuable perspective for times of financial uncertainty.