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Surprise Trump Win Could Initially Shock MarketsNovember  09,   2016

U.S. equity markets will likely enter a volatile period as Donald Trump pulled off a Brexit-like upset over Hillary Clinton to becomethe 45th President of the United States. Perhaps as important, Republicans retained majorities in both the House and Senate, animprobable sweep that could positively impact Trump’s policy success.

Surprisingly, the markets successfully handicapped a Trump win. The markets have now correctly predicted the winner of 20 ofthe past 23 presidential races. When markets are down in the three months leading up to the election, this is a strong signal thatthere will be a change in party leadership. In the last three months, the S&P 500 Index was down over 2%, paving the way for anunprecedented victory for the dark horse Republican candidate. 

Now of course, the question is, what should we expect over the very near term and looking out towards 2017? Volatility normallyclimbs in the immediate aftermath of a president election - it’s been 22% higher than average in the Novembers following a WhiteHouse contest according to Bloomberg. The Dow Jones Industrial Average dropped 5.3% after President Obama was first electedto office in 2008 and since 1928, the S&P 500 has fallen two thirds of the time in the day after a presidential election.

 

"We would view this initial correction as a buying opportunityas many great stocks will temporarily go on sale."

 

Trump is a brand-new face to the political scene and markets will need some time to adjust to the new reality of hispresidency. As a result, you will likely see some near term pressure on market multiples. We would view this initial correctionas a buying opportunity as many great stocks will temporarily go on sale. One area that could see some pressure initially ismultinationals. Trump has consistently courted blue collar manufacturing workers by proposing to renegotiate international tradedeals. While the president-elect seemed to soften his foreign policy stance during his victory speech, NAFTA, China and Mexicowere all targets during his campaign.

Anti-trade measures could temporarily trigger a slide in emerging market (EM) currencies. The Mexican peso fell sharply asTrump rallied toward victory on election night and could be a big loser as the U.S. accounts for the overwhelming majorityof its exports. The yuan could also slide due to Trump’s anti-China rhetoric. One outlier in the EM space would be the ruble,

which rallied as a Trump win became imminent as he has indicated much more openness to Russian diplomacy than previousadministrations. 

Biopharmaceuticals, Regional Banks Could Be Big WinnersOther areas of the market also stand to benefit from a Trump White House.

Health care came under the most scrutiny during the campaign as Clinton accused drug makers of price gouging and thus couldsee a meaningful relief bounce. Biotech, pharmaceuticals, managed care and pharmacy benefit managers specifically, should bebig beneficiaries. Under a Trump presidency, drug price increases will likely slow but the chances of actual drug price regulationare diminished and the Affordable Care Act could be repealed if Trump can muster enough Republican support. In the event ofmaterial changes to the ACA, managed care would be a big winner. 

Trump has supported the American shale revolution and has mentioned many times that he would remove onerous legislation tohelp unlock the productive potential of the U.S. energy sector. Estimates have U.S. production growing by half a million barrels perday with the new administration. That incremental increase could push the price of oil down in the near term but it’s great longerterm for many U.S. operators. Permitting drilling and pipelines, especially on federal land and water, should become easier. 

A Trump presidency would likely be bullish for the financial sector longer term. Although a repeal of the Dodd-Frank Act mightbe a stretch, Republicans should be able to limit additional regulation. One area that might be a sweet spot is regional banks.There has been bipartisan  support for raising the asset threshold that determines whether a bank is designated a “systemicallyimportant.” Lifting the cutoff to $250 billion from the current $50 billion would loosen the regulatory shackles on regional banks, likely lower their compliance costs and potentially reduce overall capital requirements.

Markets and the economy could also see a boost from Trump’s promise of increased infrastructure spending and his plans tolower personal and corporate income tax rates. But this proposal would create a situation where our debt would grow by a largeamount. Third party estimates have our deficit growing $4-5 trillion if this plan is enacted. Longer term, that will most likely meana weaker dollar and higher Treasury yields because we are growing our debt at a much faster pace. 

Once the post-election volatility subsides, most sectors should see some positive momentum due to a sense of relief as well asseasonality. November and December are historically strong months for the market, as is the first year of a new president's firstterm, as the S&P 500 Index climbs 8.2% on average. Trump’s policies, if enacted, should create faster growth, higher profits, andlower taxes. All of which are good for equities longer term.

Jeffrey Schulze, CFAInvestment Strategist15 Years experience  6 Years at ClearBridge

All opinions and data included in this commentary are as of November 9, 2016 and are subject to change. The opinions and views expressed herein are ofJeffrey Schulze, may differ from the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice.This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable,but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments nor its information providers are responsible forany damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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