Global markets responded swiftly to the surprise results of the U.S. elections.
The S&P 500 (+3.8%) and the Dow Jones Industrial Average (+5.5%) posted their largest weekly gains in years, while international markets were flat to down.
The all-Republican sweep has companies and investors evaluating their strategic plans in light of the possible sea change in policy. Heavy-handed regulation and taxation appear to be squarely in the new administration’s bullseye, and we expect certain sectors to flourish and others to face a more challenging environment.
That said, policy changes that do occur could progress at a slow pace, as Democrats in the Senate are likely to attempt to block many aspects of the new administration’s domestic and international agendas.
With all that in mind, here is our brief overview of what may be in store for investors under the next administration.
Potential Policy Changes
The Republican economic agenda is built on the ideas of corporate growth and competitiveness.
- Top priorities appear to be removing the more onerous regulations in the financial services and energy sectors.
- Global trade agreements are also up for renegotiation. Although we expect there to be changes, we ultimately believe that free trade will persist (albeit more slanted toward U.S. corporate interests).
- Taxes, both individual and corporate, will be reviewed with the goal of shifting to a simpler, more globally competitive framework.
- Spending on infrastructure projects in the U.S. is likely to rise.
- Domestic market sectors including financial services, energy, healthcare and industrials are poised to benefit from a favorable growth environment.
- Banks, in particular, should benefit from rising interest rates, a friendlier risk-taking environment due to fewer regulations, and reduced oversight. Banks already have strong balance sheets and should be able to provide capital to other sectors as competition ramps up.
- Companies with significant amounts of cash on their balance sheets, such as Apple, could benefit from repatriation tax legislation.
- Mergers and acquisition activity may accelerate meaningfully in 2017, if the new administration raises fewer anti-trust objections to proposed deals than the current administration. That, in turn, could benefit small-cap stocks, which represent growth opportunities for larger corporate acquirers.
- Domestic market sectors with significant interest-rate exposure (such as utilities, real estate and consumer staples) may face headwinds if interest rates rise as expected.
- Foreign markets may also be more volatile. On the plus side, stronger U.S. economic growth could potentially create stronger global growth that benefits foreign financial markets down the road.
- Bonds may face real increases in interest rates. If so, the pace of those increases will depends on how global markets respond to the initial rate hikes. Overall, we do not expect there to be as much support for bonds as there has been in recent years.
- Industries that benefit from large government subsidies, such as solar and electric car makers, could get hurt if subsidies are reduced or left to expire (e.g., Tesla has historically relied heavily on government subsidies).
- Currently overpriced FANG stocks (Facebook, Amazon, Netflix, Google) and similarly overvalued shares could be in for a rough ride. Companies like Amazon and Netflix, with P/Es of 173 and 328 respectively, have been bid up because of their relatively strong growth in the current low-growth environment. If overall economic growth accelerates and a broader array of companies begin to follow suit, the “growth premium” awarded to these companies may dissipate.