While President-Elect Donald Trump met with outgoing President Barack Obama, portfolio managers at T. Rowe Price tried to make sense of sudden market volatility and how to make the best of a black swan event they didn’t see coming.
“Overall, financial markets may not react well to the outcome of this election,” said Alan Levenson, chief U.S. economist with T. Rowe Price. “The risk to U.S. growth in the near term is to the downside.”
A black swan is an event that cannot be predicted but often acts as a catalyst that causes the market to depart from the expected. For example, experts say Brexit was a black swan because it occurred suddenly and unexpectedly.
“The initial reaction to Brexit was extremely bumpy but then things calmed down, at least for a while,” said Quentin Fitzsimmons, a bond manager with T. Rowe Price. “Similarly, with a Trump presidency, it may be that investors are headed for a prolonged period of shock management.”
Financial Reform Questioned
If Trump repeals Dodd-Frank regulations and reinstates Glass-Steagall legislation as he vowed to do on the campaign trail, the move could be positive for some financials if enough safeguards remain in place to manage systemic risks, according to Gabriel Solomon, manager of financial services strategy with T. Rowe Price.
“But a blanket repeal of Dodd-Frank would not be positive because some of the regulations are good for managing the risks that led to the 2008‒2009 financial crisis,” Solomon said.
Many see the impact of Trump’s election as a wild card.
“Apprehension over his protectionist agenda could lead to reduced global growth expectations because the United States could end up with an adverse mix of slower growth and marginally higher inflation,” Fitzsimmons said.
Drug Stocks, Energy Production Could Benefit
With an intent to repeal the Affordable Care Act, Trump’s presidency is expected to lead to a market correction.
“This could end up being modestly positive for health care stocks and his overall election is perceived as good for drug stocks,” said Ziad Bakri, biotechnology analyst with T. Rowe Price.
Energy production is one sector that potentially will benefit from Trump’s promise to reduce regulation.
“It could lower companies’ costs to pull resources out of the ground,” said Jeff Rottinghaus, a portfolio manager in the U.S. Equity Division of T. Rowe Price. “In a vacuum, more energy production is a good thing because it leads to more jobs, cheaper oil and cheaper gas.”
Heading for a Trade War?
“If we slow immigration of working-age adults, there’s not enough growth in the rest of the U.S. workforce or the overall productivity rate to grow the economy very fast,” Levenson said. “Most of our net population growth comes from immigration.”
One of Trump’s more popular campaign proposals had to do with building a wall between U.S. and Mexico soil to stop what he called the flow of illegal immigrants, ‘drugs and rapists’ across the border.
However, Mexico’s foreign minister Claudia Ruiz Massieu reportedly said his country will not fund the construction.
“Trump’s trade threats may be no more than opening ploys to secure concessions,” Fitzsimmons said. “But the risks of miscalculation would be high and could lead to very damaging trade wars, which could have a negative impact across the U.S. economy not just limited to those areas directly linked to international trade.”
Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected]
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