What are the investment implications – downward pressure on risk and US bonds
Given Trump's controversial campaign rhetoric, we expect the downward pressure on risky assets to continue in the coming days, or until there is more clarity on his policy agenda. Assuming the high probability of tax cuts at a time of full employment, the Treasury curve will, in our view, steepen. The outlook for US equities may improve if immigration issues do not become a key policy focus under the Trump presidency. It is worth noting that the stock market outlook is being influenced by opposing forces depending on potential fiscal easing under Trump's presidency as opposed to the strengthening of the anti-globalization narrative in his campaign rhetoric. In the near term, based on the stock market's reaction (if the damage is substantial), the Federal Reserve may decide not to raise interest rates in December. Beyond that, we expect a more hawkish trajectory from the Fed to support fiscal easing.
On the currency front, the US dollar initially weakened against the currencies of other advanced economies. However, the dollar may not stay that way under Trump's presidency, especially if fiscal easing takes priority over other more controversial campaign promises, even if this requires monetary policy tightening.
Trump policies – what do we know?
Trade and immigration have been central issues during Trump's election campaign, where the executive arm has more leeway on policy implementation. In the United States, Congress has the sole power to distribute funds, and the discretion of the executive branch has shrunk over the years.
In terms of immigration, the executive has more discretion, a power used by President Obama to influence policy. Here, Trump's pledge to deport illegal immigrants is a realistic possibility – a policy direction that will need to be closely monitored in the near future.
Commerce is also an area of greater discretion for the executive. The US constitution states that Congress has a mandate to handle trade with foreign nations, but over the years, control has been relinquished to the executive. More importantly, presidents have the ability to withdraw from bilateral and multilateral agreements, which under Trump's presidency could jeopardize the North American Free Trade Agreement (NAFTA) and potentially US membership in the World Trade Organization .
Shifting attention to more immediate economic policies under Trump's presidency raises the likelihood of tax cuts, also considering the Republican majority in Congress, which would lead to higher inflation and support growth in the short term. However, the long-term implications of an aggressive foreign and trade policy will clearly be negative. That said, given Trump's history of many shifts in position, much remains to be clarified before making any strong judgments about long-term policy orientations and consequently the resulting investment implications.
Polarization and populism on the rise
In America, a process of polarization at the level of gender, race and politics has been going on for some time now. Figure 1 depicts the growing divergence between Republicans and Democrats on various issues, a trend that has been underway for a decade and which accelerated in the aftermath of the 2008/2009 financial crisis. Similarly, the distribution of views on political values between the two camps clearly shows a gap that has widened over the past decade (Figure 2). And in fact, based on the detailed analysis conducted by Matthew Gentzkow (Stanford University), it seems clear that polarization is real and represents a serious issue.
