Investment Clock insights

Economic impact of US election


Ian Kernohan

9 November 2016

The election of such an apparently unpredictable character to be US president is a major surprise for markets, and comes ahead of a series of important European votes, starting with the Italian referendum on December 4th.  As with the Brexit vote, it’s yet more evidence of a sense of disaffection with the political establishment. 
While Mr Trump’s mandate is clear, the exaggerated rhetoric of a political campaign often gives way to the realities of power.  Many US Presidents find themselves constrained by Congress, and while Republicans will be dominant on Capitol Hill, the new President is not representative of his party on fiscal policy or free trade, his two key platforms.
Mr Trump's fiscal stimulus plan would be supportive for US economic growth, however with trend growth lower thanks to a productivity shortfall and structural demographic pressures, it is difficult to see the US economy growing much more rapidly without running into overheating inflation, and a more hawkish Fed, although Mr Trump’s election may  delay a December rate hike.  Restrictions on immigration will also be a constraint on labour supply growth.  
His protectionist stance, even if only implemented in part, would be inflationary, via raised tariffs and duties.  In summary, his proposed mix of policies is not friendly for bond markets and suggests for a steeper yield curve, which is already beginning to be reflected in global markets.

The election of such an apparently unpredictable character to be US president is a major surprise for markets, and comes ahead of a series of important European votes, starting with the Italian referendum on 4 December.  As with the Brexit vote, it’s yet more evidence of a sense of disaffection with the political establishment. 

While Mr Trump’s mandate is clear, the exaggerated rhetoric of a political campaign often gives way to the realities of power.  Many US Presidents find themselves constrained by Congress, and while Republicans will be dominant on Capitol Hill, the new President is not representative of his party on fiscal policy or free trade, his two key platforms.

Mr Trump's fiscal stimulus plan would be supportive for US economic growth, however with trend growth lower thanks to a productivity shortfall and structural demographic pressures, it is difficult to see the US economy growing much more rapidly without running into overheating inflation, and a more hawkish US Federal Reserve, although Mr Trump’s election may  delay a December rate hike.  Restrictions on immigration will also be a constraint on labour supply growth.  

His protectionist stance, even if only implemented in part, would be inflationary, via raised tariffs and duties.  In summary, his proposed mix of policies is not friendly for bond markets and suggests for a steeper yield curve, which is already beginning to be reflected in global markets.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.