While 2016 and the U.S. presidential election are in the rear-view mirror, the U.S. political environment remains front and center for the markets. Let's look ahead to what a Trump presidency could mean for investors.
The first year of a U.S. presidential term has historically been positive for the markets. Since 1940, in the first calendar year following the election, the TSX has risen by an average of 8.4% and the S&P 500 has risen 6.3%.*
Although President Trump's policies represent a change from the status quo, we expect more moderate impacts than the headlines or initial market reactions might suggest. We think the impacts in Canada will vary, with a range of influences across the economy and financial markets. We'd note that these influences are unlikely to occur in isolation. Instead, impacts are likely to feed through the economy, interest rates, commodities and the markets. Let's look at four key policies that will likely have the greatest influence on economic expansion.
Exports represent a quarter of Canada's economy, three-quarters of which go south of the border – so an improving U.S. economy should be a positive for Canada. Improving GDP growth in the U.S. is typically accompanied by an uptick in Canadian exports. This, in turn, could influence interest rates over time.
In fact, rates initially moved higher in response to the U.S. election, anticipating that faster U.S. GDP growth would provide an upward influence on inflation. We expect the U.S. Federal Reserve to raise interest rates in 2017, while domestic headwinds will keep the Bank of Canada on the sidelines. The net effect, in our view, will be a widening of the gap between U.S and Canadian interest rates for a period of time – and interest rates can impact currency fluctuations.
We've also seen improving sentiment drive the recent rally in stocks, but the next leg of the bull market (which we believe will be extended) will need to be driven by rebounding corporate profits. A considerable driver of recent earnings weakness has been led by the rising U.S. dollar and falling oil (which has crushed energy sector earnings). Better-than-expected GDP growth would support a much-needed increase in revenue growth, which would help offset any potential ongoing headwinds that may come from the dollar and oil.
Overall, we think the underlying fundamentals of the market remain reasonably healthy, and will not solely be dependent upon President Trump's policy proposals or legislation. With that in mind, we recommend the following actions:
*Past performance is not a guarantee of how the market will perform in the future.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
Diversification does not guarantee a profit, nor does it protect against loss. There are special risks inherent in international investing, including currency fluctuations and political, social and economic risks.