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Q: Should we expect markets to slump under Trump?
A: While Donald Trump’s presidency is not the only factor that could affect your investments in 2017, it is potentially a major one. His policies have already had an effect. Inflation expectations and stock-markets have risen while bond prices have fallen. But there are risks. What if Trump cannot pass his policies through Congress? And even if he does, is there any guarantee that they will have the growth-boosting effect many are now predicting?
There remains the issue of debt, with both government and consumer borrowing still historically high in many western nations. This may slow the pace at which rates may rise and inhibit economic growth. With regards to the bond market, inflation expectations have risen in anticipation of Trump’s employment and spending policies, driving bond yields higher and prices lower. Taking a long-term view, yields remain comparatively low, both in absolute terms and in real terms, taking account of inflation.
Stock-markets have rallied with some hitting all-time highs. Strong gains have come since Trump won the presidential race with investors expecting his policies to reinvigorate the US economy and for this to spread out further. Despite most stockmarkets experiencing substantial gains, some of the main valuation metrics do not appear out of control.
Lastly, in terms of currency, Trump’s potentially inflationary policies have lifted the outlook for interest rates, particularly in the US. The Federal Reserve raised rates in December 2016 and is expected to do so several times in 2017. As a result, the US dollar has strengthened against a basket of currencies as the prospect of higher rates attracts investors. This suggests to us that the period of volatility will continue. While this will provide opportunities, it will also require careful navigation and diversification will be as important as ever in portfolios. The article is for information purposes only and should not be interpreted as investment advice.