Economic Commentary: Trump

This commentary is a purely economic analysis of the election results. 

This election marks a major secular shift that will replace the long-term trends of 1. increasing global interconnectedness, 2. mild fiscal policies, 3. sluggish domestic growth, disinflation, and falling bond yields, with 1. economic and social isolationism and protectionism, 2. expansive fiscal policies, and 3. faster domestic growth, higher inflation, and rising real yields.

On election night, global markets tanked.By noon the next morning, US equities had regained all the lost ground and then some (although emerging markets remain depressed). Why?

The first reaction was a top-down analysis.Trump has threatened economically devastating protectionist trade wars. He's threatened to pull out of NAFTA, to impose massive tariffs on China, and much of his economic policy seems vague and poorly thought out. These factors are all heavily bearish all equity markets.

The market rally was a bottom up analysis focusing more on the GOP control of the legislative branch than of the Trump presidency. The promise of rescinding Dodd-Frank sent financial stocks higher.A likely reduction in environmental regulation sent investors scrambling to buy the energy sector. Less regulation of pharmaceuticals (both in general, and due to the failure of California's proposition #61 to pass), is bullish the biotech sector.  

Additionally, investors found evidence for optimism among Trump's policy goals. Greater infrastructure spending and repatriation of offshore corporate cash could spur domestic growth. Lastly, investor Ray Dalio of Bridgewater notes that there was also a sudden shift in market participants - "those who drove the markets after his election were largely those who kept their powder dry until they saw the outcome and chose to process (and bet on) the policies themselves."

Markets are very cautiously reflecting an expectation for higher US GDP growth, moderately higher inflation, and higher real interest rates. Markets are also implying that Trump will enact at least some of his protectionist policies, which will be very damaging for emerging markets, especially those that are export-focused like Brazil. It's critical to note that on many of these policies, Trump and the GOP leadership are at odds.

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Disclosure: None. 

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