November marked one of the most extraordinary election upsets in political history. Donald Trump defied polls, pundits and markets in a stunning upset to become the 45th president of the United States.
The Australian share market gained 1.9% in the month of November, closing at 5,502.4 points. The United States Dow Jones index gained 5.4% and the Japan Nikkei 225 gained 5.1%.
Like the surprise Brexit vote in June, Trump’s campaign rode to victory on a populist wave of discontent with the status quo, establishment leaders, migration and free trade. As with Brexit, we saw an initial market sell-off, followed by a rally.
The chart below highlights the volatility in share markets following the United States election result.
Source: Yahoo Finance
Most people expected that Democrat candidate Hillary Clinton would not only win the United States election, but markets would rally on the result. Instead, the outsider won and northern hemisphere markets surprisingly rallied on the news.
The cause of the unexpected market reaction could be put down to the fact that the Republican Party enjoyed a clean sweep in the United States Congress (which should greatly reduce the amount of political gridlock), the gracious tone to the President-elect’s victory speech, or simply that markets are more accustomed to 'shocks' following the Brexit vote in June.
Nevertheless, there is little doubt that global economic uncertainty will amplify if Trump’s policies are implemented. Furthermore, Trump’s growth agenda will most likely be inflationary and push interest rates higher.
How the United States share market (and global share markets for that matter) react to a world of higher earnings growth and a higher cost of capital remains to be seen. In addition, United States debt which is already at a peace-time high of 106% of GDP, is also likely to rise further and may become a major concern for credit ratings agencies in time.
The short-term flow on effects to the Australian economy of a Trump presidency (potential free trade issues aside) may be the end of the low interest rate cycle and a weaker Australian dollar.
While the Reserve Bank left the official Cash Rate on hold in November at record lows of 1.50% per annum, a decline in the Australian dollar by 1.7% in the month should ease some of the Reserve Bank board members’ concerns over the currency.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.