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Trump means ambiguity plus a range of market outcomes

Bruce Cooper is chief executive officer and chief investment officer at TD Asset Management, and senior vice-president at TD Bank Group.

The contentious U.S. presidential race finally ended with a win for businessman and reality-television personality Donald Trump. Mr. Trump has been referring to the final week of the campaign as the end of the beginning. His beginning has been anything but predictable, and as we move beyond it, we expect that to continue.

Given the shortage of specifics regarding his proposed policy initiatives, the only thing that's certain is that we're in for a period of uncertainty, at least until there is a more comprehensive understanding of his plans. And since markets dislike ambiguity, we expect to see increased volatility and a significant negative reaction in financial markets.

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Details related to Mr. Trump's plans have been scarce. For example, during the election campaign, Hillary Clinton pledged to allocate $275-billion (U.S.) to stimulus spending over five years – and Mr. Trump promised to "at least" double this. If the stimulus plan were to proceed and be successful, it should provide a modest boost to economic growth in the United States, which would support corporate earnings.

Companies in the industrials and materials sectors in particular should benefit from increased infrastructure spending and, given the size of his proposed stimulus package, there are likely to be positive spillover effects for Canadian companies. However, it is important to note that the scale of his plan will significantly increase the national debt over 10 years. In addition, the stimulus would be in the context of an $18-trillion economy – helpful, but unlikely to move growth to warp speed.

Mr. Trump has also promised to lower corporate and personal taxes, which may provide an economic boost. In addition, he supports the repatriation of U.S. companies' offshore profits. This may also allow some companies that currently have large cash balances overseas to increase their dividends and share buybacks, which would support their stock prices.

In terms of the hard-hit energy sector, Mr. Trump's support of fossil fuels should be positive for oil and gas, energy infrastructure, drilling and coal companies, but negative for companies in the renewable energy space. He has suggested that the Keystone XL pipeline proposal should be resubmitted. If it is approved, it should help lower price differentials for Canadian oil.

One notable area of concern is Mr. Trump's anti-trade rhetoric. He has indicated opposition to the Trans-Pacific Partnership, pledged to force renegotiation of the North American free-trade agreement and insisted that he will introduce tariffs on Chinese goods being imported to the United States. His protectionist tendencies are likely to lead to less trade, potentially lower corporate earnings growth (particularly for large multinational companies) and higher prices for consumers, plus they may slow economic growth, especially if China retaliates with its own tariffs.

Mr. Trump has said he will not renew U.S. Federal Reserve Board chair Janet Yellen's term, and the selection of a new chair may fuel uncertainty. Regardless, we anticipate that interest rates will remain low and believe we are unlikely to see significant increases in longer-term bond yields any time soon. While the Fed may increase rates before the end of the year, the pace of increases will be slow. In fact, we anticipate this will be the loosest tightening cycle in its history.

Over all, Mr. Trump's victory showcases significant voter discontent, a sentiment reflected in the increasing status of populist parties in Europe. In coming months, there will be a referendum in Italy and an election in France, and both countries have witnessed notable increases in the popularity of such parties. Speculation about potential outcomes could cause further market volatility as they draw closer, and we anticipate that increasingly divisive political debates will be a source of market volatility for years.

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With this uncertain backdrop, investors can be well served by retaining a long-term perspective and maximizing diversification benefits within their portfolios. This should allow them to weather a broad range of potential outcomes.

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