1. US elections 2016: Markets likely to see increased ‘flight to quality’

US elections 2016: Markets likely to see increased ‘flight to quality’

The market is undoubtedly happy to have this election behind it and can now begin the process of moving forward.

Published: November 9, 2016 6:36 PM
Despite the presidential outcome, we continue to see recent fundamentals as constructive; economic growth and the labor market continue to improve at a gradual rate. (Reuters) Despite the presidential outcome, we continue to see recent fundamentals as constructive; economic growth and the labor market continue to improve at a gradual rate. (Reuters)

The market is undoubtedly happy to have this election behind it and can now begin the process of moving forward. Given the unexpected nature of this win, we will have to wait and see what the longer-term response will be in the markets. Clearly, the initial reaction has been volatility, which we would largely expect given the future uncertainty around a Trump presidency and White House.

Now that we have clarity on the White House and Congress, the focus will shift to policy and the way forward. We believe actual policy actions vs the rhetoric we have seen from President-elect Trump throughout the campaign will most likely differ by a large margin. Many of the policy items discussed on the campaign trail cannot be implemented without bi-partisan support. Unfortunately, that means we most likely will see elevated levels of volatility in the markets including a “flight to quality.” These conditions may continue until the market gains comfort in the way forward under a Trump presidency.

As we have highlighted before, fundamentals ultimately drive the longer-term performance in the fixed income markets. Despite the presidential outcome, we continue to see recent fundamentals as constructive; economic growth and the labor market continue to improve at a gradual rate. We believe these fundamentals, along with the passage of this election, should give the Fed confidence to continue the tightening process and raise rates in December, albeit at a very measured pace. This unexpected outcome may delay that hike due to market volatility, but we don’t see this outcome as materially altering the course of the US economy in the near term.  While we continue to watch for short-term dislocations, we remain anchored in our investment discipline of focusing on the fundamentals and investing through the cycle.

As we look forward, there are some potential headwinds that we will have to navigate. As we have seen throughout this election, there still are fairly strong divisions within the parties. We think the next 100 days are critical for the newly elected officials in the United States, and we will continue to gain clarity on many policy items over that timeframe. There is no doubt that this election, and outcome has challenged the status quo and we could see even small issues become larger should impasses persist. We have seen these periods before and in some cases they have led to volatility. Although the election is now behind us, the current political landscape will remain as a point of importance when investing within the fixed income markets.

Christopher Molumphy, CFA
Executive Vice President
Chief Investment Officer
Franklin Templeton Fixed Income Group

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