US election - tariffs, protectionism and inflation the key fears as Trump takes the White House

9 November 2016

Russ Mould, investment director at AJ Bell:

“A drop in stocks and gains in safe haven assets like the yen and gold are textbook knee-jerk reactions to unexpected events.  However, once they sit down and think more clearly markets will need to consider long-term issues such as protectionism and inflation as potential dangers and a pro-growth agenda as a potential benefit when they address what a Trump Presidency may mean.

Short term

“In the very short term, stock markets look set to fall given the uncertainty posed by an outsider candidate unexpectedly becoming America’s Commander-in Chief. Following on from the UK’s referendum vote in June, this reinforces the presence of political risk that has been absent from developed markets for most of the last two decades – especially as we have the Italian constitutional reform vote to come in December and then elections in the Netherlands and France in spring 2017.  All three of those countries have “protest” parties which are already gathering momentum.

“Investors will also be aware of the historical patterns which show the Dow Jones Industrials has fallen by an average of 1.2% the first year of a Republican President since 1945. In addition, the US benchmark has fallen on all four occasions in the 12 months after the White House has passed from Democratic to Republican control.

“One potential straw at which markets which clutch is that the volatility may persuade a knock-kneed US Federal Reserve not to raise interest rates at its next meeting on 14 December – the central banks has already cited financial market ructions as an reason for standing pat on more than one occasion this year.

Long term

“On the plus side, markets would have usually welcomed a President whose agenda includes corporation tax cuts and a substantial (if still vague) infrastructure investment programme, as both could boost a US economy which still appears to be stuck at stall speed.

“The biggest long-term downside risk is posed by Trump’s protectionist, even isolationist stance, for two reasons.

“First, economists agree on very few things but one point of consensus seems to be that the introduction of tariffs in the 1930s made a difficult situation an awful lot worse than it would have been otherwise. There is already clear evidence of slowing international trade flows and tariffs would be a further burden on this front.

“Second, tariffs and protectionism are inherently inflationary. Rolling back the disinflation prompted by two decades of global supply chain management would spook bond markets and potentially mean central banks have to take interest rates higher more quickly than expected. The Fed may therefore pause in December but could find itself playing catch-up, if Trump does impose tariffs on imports from Asia, Latin America and Europe – a prospect which is likely to weigh on emerging market stocks particularly heavily.”

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