Yesterday’s US election had already weighed on markets to an unusual extent in recent weeks, even though economic data generally continued to brighten up. Thus, the actual preliminary result is not quite as surprising as some media headlines may imply, and the current market turmoil could once again prove temporary. We therefore cautiously maintain our constructive broader market view.
In the couple of weeks before election day, opinion polls began to turn in favor of Donald Trump, the Republican nominee, calling into question the previously widely-held view that Hillary Clinton, the Democrat’s candidate, would ultimately win. Market volatility began to rise at that point. By last Friday, the S&P 500 volatility index, or VIX, had already climbed close to levels last seen shortly after the surprising Brexit-Vote in June. The S&P 500 index itself had booked losses for nine consecutive trading days - something that had not happened in 36 years. Investors clearly began to price in a Trump victory.
With yesterday's victory for Trump, this process has at least partially been completed, which will eventually allow investors to move on. Market participants should soon be able to recognize that macroeconomic fundamentals and market trends remain rather benign overall. Our macro view for the coming months relies on structured fundamental and market-internal analysts, and we see little reason to change our broader investment positioning on an ad-hoc basis. Generally, an unchanged tactical asset allocation (TAA) implies a portfolio rebalancing stance - i.e. that turbulences should be used for purchases, while big rallies offer themselves for sales.
From our perspective, despite the noisy election campaign, the underlying core positions of the candidates never differed materially from those of other Republicans and Democrats in the past. Beyond that, social and economic developments have been pointing to increasingly divided, protectionist and radicalized electorates in many established democracies for years, so the US election result does not really offer new insights here. Last but not least, medium- to longer-term portfolio decisions should not be made ad-hoc, based on unpredictable political events.
That is not to say that political developments are generally irrelevant - they are not. But as investors we differentiate different levels and time horizons of allocation decisions. Firstly, underneath the TAA level, our portfolio management teams continuously monitor markets, and take actions to benefit from short-term fluctuations in either direction. Exogenous events, such as elections, can play a role on this level. Indeed, our portfolio management teams had already taken action to hedge against the risk of a temporary surge in volatility. However, these so-called PM-overlay decisions do not fundamentally alter our TAA.
The highest level is represented by the long-term strategic allocation (SAA), whose purpose is to anticipate broad market trends years in advance. That said, the current political situation is ultimately based on political and social trends that have been building up for years in many industrialized countries - and were further exacerbated by the weak economic recovery from the US financial crisis of 2007/2008, as well as the problems that followed in its wake. In our case, the SAA already addresses the key resulting issues (very low interest rates, increased fragility and volatility of the economy and the markets, reduced long-term returns expectations, etc.). Thus, on this level too, yesterday’s election per se adds nothing new for us.
The bottom line - the US elections are now over. What remains is a relatively benign cyclical macro environment, coupled with dovish central banks, and more stimulus-friendly governments. The Republican victory may also mean more business-friendly policies in the US going forward, perhaps counterbalanced by increased trade protectionism. As soon as the dust from the initial political shock settles, markets are thus likely to recover again, and we will be monitoring the situation accordingly in the coming days.
Note: The next LGT Beacon will be published on 23 November 2016.