After a long, tumultuous and hotly contested political season, Donald Trump and the Republican Party claimed victory in the 2016 U.S. elections. Trump will become the 45th president of the United States. He will be greeted in Washington, D.C. on January 20 by a Republican-controlled Congress.
It is clear that growth is going to be an overarching theme for the new president and there are a few key areas to focus on:
“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We're going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”
--Donald Trump, November 9, 2016
In his election victory speech, Donald Trump again shared his views on the country’s aging infrastructure and his determination to focus on rebuilding and renewal. Trump has pledged to spend over $550 billion on infrastructure projects in the U.S. over a five-year time frame. If fullfilled, this investment would boost U.S. GDP output. These projects would also create new jobs and fuel economic growth.
Trump’s focus on infrastructure projects, which requires increased government spending, has the potential to increase inflation. While inflation has been historically low for many years, an increase would catch the eye of the Federal Reserve as one of their mandates is to keep inflation in check at a 2% target.
The potential for the Fed to increase interest rates has been its own story line for much of the year. Now that the election is over, all eyes will look to the next Federal Open Market Committee meeting December 13-14 and what the Fed will do. The Fed Futures contracts are now indicating an 82% probability of a 0.25% rate increase in December.
Markets initially reacted negatively to the news of a potential Trump victory. At one point, the Dow Jones Industrial Average futures were down nearly 800 points. This negative reaction turned positive once the U.S. stock market opened this morning. In fact, U.S. stock markets rallied today with the DJIA closing the day up 1.40%. The Dollar had its largest gain since the Brexit vote in June and the 10-Year Treasury Yield finished above 2.00% for the first time since January. It’s worth mentioning that, since 1980, this period we’re entering between Election Day and Inauguration Day has been positive for stocks in 7 out of 9 election cycles with an average return of 0.32% for the S&P 500 Index.
So, do markets tend to favor one political party over the other? Since 1900, the markets have historically performed better with a Democratic president at the helm. That said, when looking at the combination of a Republican president and Republican-controlled Congress, that scenario has produced an average return for the DJIA of 7.0%. The last time an election produced a Republican sweep was the election of 1928.
During this period of transition for the country, it’s important to maintain perspective, stay focused on your long-term investment goals, and look ahead with optimism.