When news of Donald Trump’s impending election victory started filtering through in the afternoon of 9 November 2016, markets were thrown into turmoil. The Australian sharemarket lost almost 5% in the space of a few hours, the US sharemarket pointed down 5%, oil plummeted and gold shot up. However within 12 hours, calm had been restored.
Sharemarkets rebounded, oil recovered losses and gold retreated. And in the following days, share and commodity markets surged as hopes of Trump-led economic growth gained currency. Gold recorded its worst week in three years, falling 6.1%.
Donald Trump’s victory may have been a surprise for some, but the ensuing rise in markets caught almost everyone off guard. Most market commentators had forecast short term panic; one predicting sharemarket falls of between 5 and 10 percent, a plummeting Australian dollar and surge in the gold price. Like so many others before them, these predictions did not come to fruition.
So what are the likely medium to long term implications of Trump’s victory for Australian investors? In short, the answer is uncertain. And in general, markets do not like uncertainty. Will Trump the President retain the more contentious policies of Trump the Election Campaigner? Will the Republican Congress allow these policies to become law? How will the world, particularly China, respond to Trump?
It will be some time before we know the answers to these questions. But early signs are far from the doom and gloom predicted.
There is a widespread perception that Trump’s policies are good for growth. His policies include lowering corporate and personal taxes and increasing spending on infrastructure. These types of policies are generally stimulatory for the economy and good for sharemarkets. So while Trump’s aggressive election rhetoric was largely destabilising on market confidence, his policies may end up building confidence in markets and creating more certainty.
And what is good for the US sharemarket is generally good for the Australian sharemarket as our market tends to take its lead from the US market. And infrastructure spending is generally positive for commodities which in turn is good for Australian shares (particularly miners) and our terms of trade.
However, Trump’s policies tend to be more insular, nationalistic and populist – much like the increasing global political mood that produced Brexit and the rise in populist parties around the world, including Australia. This mood is generally not conducive to global stability. Talks of tariffs and watering down trade agreements could hurt Chinese exports and lead to retaliatory trade policies – neither of which is good for Australia which may end up caught in the crossfire.
Trump’s focus on growth is also likely to increase inflation which may be bad news for bond markets but good news for term deposit investors.
So what should investors do now? In short, resist the temptation to react to any panic in the markets. Panic selling in market busts and panic buying in boom times are two of the greatest destroyers of long-term wealth. Your best defence is to have very clear long-term goals with an investment portfolio that is well diversified across different types of assets and aligned to your attitude to risk.