Against All Expectations - Alaska Permanent Capital Management


Against All Expectations

election-map-2016The markets were positioned for a Clinton victory and a divided government and will recalibrate based upon Trump’s surprise victory. Investors now must sort out the potential effects of an unexpected tax cut stimulus and trade protection risks.

APCM’s investment team recaps the initial shock

“The initial drop in U.S. futures was approximately 5%, but most of the losses were recovered by the time the market opened. The Dow Jones is up over 0.80% while the S&P 500 is up over 0.70%, both indexes are trending upward. Gains in healthcare, energy, industrials and financials are overwhelming losses in technology, real estate, telecom and utilities.  Europe is mostly positive with Swiss and German markets up 1.99% and 1.56%, respectively. Asia was hit the hardest with Japan closing down 5.36% and Hong Kong down 2.16%. However, futures in Asia are up so these markets should recover most of the losses from the post-election drop. Sovereign yields are up across the board except in Asia. The dollar and gold are both up, but less than a percent. Volatility increased leading up to the election, but is back to average levels as of this morning.”

-Kirsten Halpin, Investment Analyst

“Bonds have sold off, and yields are pushing higher. Currently the 10yr yield is over 2% for the first time since early 2016. Long-term inflation expectations have increased as the potential impact on trade over the long-term should push inflation higher.”

-Bill Lierman, CIO Fixed Income

Ultimately we envision a rational response from investors as they remember our political system was created with checks and balances and Trump will have to work with Congress to push his agenda. We should not draw decisive conclusions based upon the Republican sweep as Trump’s agenda does not completely align with many “establishment” Republicans.

The markets positioned for the consensus election outlook but your portfolio was not!

At APCM, we focus on what we can control. Mainly asset allocation, reasonable long term market expectations and keeping fees and expenses low for our clients. We steer clear of positioning portfolios based on accurately predicting elections and other macro events. Certainly this election and the BREXIT results remind us to remain convicted to this philosophy.

Our portfolios are well diversified, limiting any concentration risks associated with this surprise victory while also maintaining exposure to areas of the market that can benefit from the positive implications of this post-election repositioning.

Trump’s policy priorities introduce both upside and downside market risks, particularly regarding investment outcomes related to trade, tax reform, infrastructure spending, health care and lower regulatory risks.

Certainly, less regulatory risk could be a potential near term positive. Trade is an area where the president has the ability to unilaterally make changes. If Trump renegotiates free-trade agreements in attempt to “protect” US manufacturers he would most likely hamper the global supply chain and export markets, offsetting any potential economic stimulus from tax cuts infrastructure spending.

The market disruption caused by Trump’s unexpected win could pressure the US dollar and multinationals but some opportunities could exist in the area of defense, energy, health care and infrastructure.

Bill Lierman, CIO Fixed Income also notes that “Trumps fiscal policy, already aligned somewhat with the House, will increase spending and cut taxes creating a larger budget deficit in the near term.  The U.S. Treasury will have to fund the deficit by increasing the supply of Treasuries.”

APCM’s fixed income group still believes that the Fed is still on the path to raise rates at its December meeting. In the near term, the FOMC will be more focused on the financial system. If markets are functioning and volatility remains dampened the Fed will look toward inflation as its last data point to support future rate hikes.

We are neutral stocks and bonds. Within fixed income, we are currently overweight cash, a position we recently took given current stock market valuations and increased uncertainty surrounding the election.

We caution against making drastic portfolio changes and coming to firm conclusions on what the election means for the markets and the economy until we have more information.

APCM’s investment advice and strategic outlook

Ultimately there are stronger structural forces like debt and demographics that will overwhelm this election response and will drive market returns over time.

At APCM, we recognize that politicians can influence these structural forces with policy, but policy implementation and the evaluation of resulting change takes time. We help our clients formulate their investment strategy and plans based upon our assessment of these realities and reasonable long term return and risk expectations.

APCM’s investment committee will update our outlook, strategy and the advice we give to our clients as the resulting impacts become clearer.

– Brandy Niclai, Chief Investment Officer, Multi-Asset Strategies


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