Trump’s Victory and the Financial Markets
With the vast majority of 2016 US election polls forecasting a marginal win for Hillary Clinton, Trump’s victory has come as a great shock to many. It is common knowledge amongst investors that financial markets respond negatively to periods of uncertainty and the initial 2% fall in the FTSE 100 when it became clear that Trump had won, proved this to be true. Many commentators have viewed the shock election result as the ‘American Brexit’, with the markets responding to the unexpected events in a similar way initially. Government bonds have experienced an increase in value, and therefore a decrease in yield due to the typical ‘flight to quality’ reaction from the market in times of uncertainty.
By the afternoon the FTSE 100 had largely recovered from the shock, revealing investors’ refusal to overact to the news, and they are right. Due to Donald Trump’s brash and unpredictable character we can expect short term volatility in not only the US stock market, but the Global equity market.
However as I am sure you are aware, equity based investments tend to yield positive returns in the long term. Short term volatility in financial markets are predominantly caused by speculators and emotional investors who aim to achieve short term gains or minimise losses by responding to current affairs and pricing anomalies. However the long term returns generated from equity investments are derived from the profitability of the underlying companies. A company with a consistently positive profitability will either distribute the additional profit to its shareholders in the form of dividends, or will retain the profit which will thus increase its share value. It is therefore unwise to panic about the recent news, given that investments are for the long term, and long term returns are not determined by political and economical shocks.
Although the promises made by Donald Trump should not in any way be taken as gospel, a number of proposed policies are likely to influence the US equity market – which will have a knock on affect on the global equity market – such as a reduction of the rate of income tax and increasing the minimum wage. Both proposals would result in an increase of household disposable income, which will thus promote consumerism, increasing the profitability of businesses in the process.
The uncertainty caused by the shock election result can cause us to expect a decrease in the value of the US dollar as is what happened to the British pound after the Brexit vote. However this is likely to attract foreign investment of which the US equity market would benefit from, just as the FTSE benefited from the reduction in the value of the pound. Therefore there should be little concern for the long term performance of your investment portfolios.
Our advice is to shrug off the short term market volatility and to have faith in the long term performance of your investments.
In light of all the recent political shocks, if you would like a portfolio review please contact Richard Higgs, Chartered Financial Planner for doctors in Bristol, on 0117 966 5699 or by email to email@example.com or through the website at www.wealthwestmedical.co.uk.