• Investment Management

Trump Win May Be Bond-Buying Opportunity

Jim Caron, global fixed-income portfolio manager, reacts to Trump’s win and says investors should play the contrarian. Here are some of his takeaways.

Look Beyond Volatility

Donald Trump’s  unexpected win has sparked market volatility, and we believe it’s similar to what we saw after the UK’s Brexit vote, when a rebound followed a very short, sharp selloff in markets. Investors shouldn’t focus on what people are doing NOW, but what they are likely GOING TO DO in the near future. I believe we should selectively seek bonds in sectors that have oversold on the news of the Trump win, and look to add risk.

Tax Factor

The Trump proposed tax reform plan, for corporations and on a personal income tax level, could be one of the biggest economic surprise factors, if implemented. Corporate tax rates would be lowered, and at the personal income tax level, people could fare better in terms of increased take-home money.

Corporate Profits

Any U.S. corporate tax reform, based on Trump’s proposals, should increase corporate profits and margins. Tax reform is the swing factor that could turn bearish economic outlooks into more bullish ones. Trump broadly has a more pro-business platform than Clinton. Sectors that stand to win most, in our opinion, are healthcare and financials, due to a roll back of regulations and policy threats.

Financial Regulations

Trump will likely try to loosen regulations on the banking sector to free it up to create and direct credit toward the real economy—the ultimate goal for central bank policy. Dodd-Frank may be peeled back a bit. 

Fiscal Stimulus

Trump seems to be taking a page from former Treasury Secretary Larry Summers’ book,  with plans to increase the demand-side of the equation via fiscal stimulus. The Trump plan for government spending is very aggressive and may increase the deficit by a few trillion dollars. But, as Larry Summers said, now's the time to do it when rates are low. 

Inflation and the Dollar

The risk of rising inflation will likely increase, driven by an aggressive increase in fiscal stimulus and reduced taxes. Any increase in inflation expectations will raise both real and nominal interest rates, which would make the dollar more attractive against other global currencies, such as the yen or euro. 

The Federal Reserve

The Fed likely will still raise rates in December because of the inflationary impact of Trump’s plans. One caveat: Could Trump’s plans increase inflation expectations so much that the Fed might raise rates more aggressively in the next two years than what’s currently priced into the markets?