What to expect from Donald Trump's unexpected victory and a Republican Congress.

Donald Trump's surprise victory-along with a GOP sweep of Congress-is sending shock waves around the world. The Republican sweep will give Trump momentum as he takes office. But there is still considerable uncertainty about his policy plans, and with Republicans falling short of the 60 votes needed to pass most legislation in the Senate, some bipartisan compromise will still be needed for the President-Elect to achieve his goals.
What's it likely to mean for investors? A post-election pullback should not be surprising. Indeed, since 1980, the stock market has dropped about two-thirds of the time the week after a presidential election-with a median loss of 1.9%. But did you know that three months later, the market was up two-thirds of the time-with a median gain of 5.7%? More recently, a big market decline after the Brexit vote was followed by a big rally, which recaptured all the post-Brexit losses, and then some.
That's why it's critical at times like these to have a long-term plan-and stick with it. "It's important to stay focused on your long-term goals," says John Sweeney, Fidelity executive vice president of retirement and investing strategies. "If you have a plan you like, stick with it. If you don't, work with a professional who can help you build one that will help serve you well, no matter what may roil the markets in the short term."
What would a Trump presidency mean for the economy and investors longer term? We spoke to a range of Fidelity experts to get their views. In general, they felt there are still many unknowns regarding what the new President and Congress may be able to accomplish, but point to two areas of agreement where Congressional Republicans and Trump align: tax reform and regulatory reform.
More importantly for investors, they emphasize that the bigger longer term drivers of stock and bond market performance are economic. And the U.S. economy is in decent shape with unemployment low, corporate earnings improving, and the global economy on the upswing. So, if you liked your portfolio strategy on Monday-and it reflected your circumstances, emotional tolerance for volatility, and financial goals-it is still the right one for you the day after the election, regardless of whom you wanted to win.
Here is a range of views and reactions from Fidelity experts on the day after the election.
Bigger focus on tax reform, cost-benefit analysis
Shahira Knight
Shahira Knight
Vice President, Fidelity Government Relations
Much uncertainty remains about Trump's policy agenda.
Legislative action will be complicated by thin Republican majorities and policy differences within the party.
The Republican sweep will bring renewed interest in tax reform.
A shift toward regulatory relief is expected.
The Trump administration brings much uncertainty and many unknowns as many of his policy priorities have not been fleshed out in detail. Moreover, while one-party rule can help a President enact his agenda, it remains unclear how President-Elect Trump will work with Republican leaders in Congress who may not be aligned with all aspects of his policy platform.
Tax reform is one of the issues where Congressional Republicans and Trump may align. Tax reform is a priority for many Republicans and a centerpiece of Trump's economic agenda. Moreover, Trump's tax plan has some similarities to the blueprint released by House Republicans this past summer. As a result, we would expect to see a renewed interest in advancing tax reform next year.
However, it is important to note that Republicans will not have the 60 votes needed to pass most legislation in the Senate, making it difficult to pass partisan policies. Legislation will need at least some bipartisan support to advance.
We can also expect to see a shift in the regulatory environment. Trump has said he will usher in an era of regulatory relief and may seek to reverse some of Obama's biggest regulatory initiatives. Trump has also proposed a moratorium on new regulations that are not compelled by Congress or necessary for public safety. Trump and Congressional Republicans are also likely to place a heavier emphasis on cost-benefit analysis around the economic impact of proposed regulations.
Expect ripple effects from a disruptive geopolitical event
Shahira Knight
Lisa Emsbo-Mattingly
Director of Research, Global Asset Allocation Group, Fidelity Investments
Trump's win could send temporary shock waves throughout stock and bond markets.
Significant changes to trade, tax, regulatory, and domestic spending policies are possible.
Fiscal expansion, including tax cuts and fiscal spending, could boost deficits and inflation.
One potential winner: gold, which should benefit from a weaker dollar.
Trump's victory is a disruptive geopolitical event because it was an unexpected outcome. Trump has discussed a lot of big policy changes involving global trade, taxes, and spending, with potentially big impacts on the economy. Not all will pass Congress, but uncertainty around them may be problematic for both the equity and fixed income markets.
First, I think it's going to create a weak-dollar environment that looks a little bit like the impact of Brexit. As we've seen Brexit play through, the pound has lost 20% of its value as investors start to price in what changes to the U.K.'s trade policy and immigration policy would really mean for the currency. As the risk of similar changes for the U.S. policy are priced into the market, you may get a weak-currency type of environment.
It's also important to remember that after we had a few days of heightened volatility post-Brexit, the stock market quickly recovered. It's hard to assess how long it will take the market to absorb the impact of a Trump victory, but the stock and bond markets tend to digest and quickly price in new information, so I think the focus going forward will soon shift back to how Trump's policies might impact where we are in the business cycle.
Trump's win is also going to put certain other currencies under pressure. If he acts on his stated opposition to NAFTA, it could mean negative shocks to real GDP for many of our biggest trading partners, such as Mexico. It would even be a negative for Canadian markets, which is also a big trading bloc for the U.S.
Longer term, I think Trump's win, particularly if he succeeds in implementing protectionist trade policies, is going to put significant downward pressure on domestic productivity growth. If you restrict the free flow of capital, labor, and trade, you're going to reduce the efficiency of markets, and that's going to reduce productivity rates and competition in markets. So the equity market selloff may be most pronounced for companies that have exposure to either foreign sales or foreign supply lines.
The only clear market winners I can see are sectors that benefit from a weak dollar. One possibility may be gold.
I also expect we will see a large fiscal expansion under a Trump administration. With majorities in both Congressional chambers, Trump will be well positioned to get traction on many of his fiscal policies. As a result, I think we should expect to see a meaningful increase in the U.S. deficit. This may negatively impact interest rates, as the Treasury market could start pricing-in these developments. In the near term, however, the abrupt rise in policy uncertainty is appearing to result in investors shifting to the U.S. Treasury market as a 'safe harbor'.
Bottom line: When I step back and assess all these factors, I think they will push the U.S. economy further into the late-cycle phase. While we had been positively disposed toward global equities as a recovery in China and continued growth in the U.S. pay dividends for economies abroad, I don't think many expected this Trump win, so very little of this has been priced into the markets already. As a result, investors must be prepared to weather a negative environment for equities and fixed income.
Less mobile global capital could lead to lower real interest rates
Bill Irving
Bill Irving
Portfolio Manager
Expect a pivot from monetary to fiscal stimulus.
Higher federal spending and less globalization may push inflation higher.
Less globalization may mean lower returns on capital, lower real interest rates, and a weaker dollar.
A rate increase in December may be the last for this cycle.
TIPS may benefit from rising inflation expectations.
Trump's victory highlighted the public's growing unease about two issues: globalization and economic growth. Going forward, I believe we're going to see a significant slowdown in globalization, and also more government spending to stimulate growth. Both factors are likely to affect the dollar and bond yields.
The broad political climate of this election and other events, such as Brexit, have signaled that globalization trends are due for a slowdown. All else being equal, I think less mobile capital means lower real returns on capital, as companies are less able to take advantage of tax, labor, and resource efficiencies in foreign markets. In turn, lower real returns on capital mean lower real interest rates and a weaker dollar.
President-Elect Trump has called for a large fiscal easing, personal tax deductions at the upper end of the income scale, and more defense spending. Even a limited implementation of these initiatives would increase the deficit significantly over the next decade.
In the short term, the environment of higher fiscal spending and less globalization should benefit TIPS, as investors anticipate rising inflation. The impact on Treasuries is less clear, as anti-globalization pushes yields down and inflation up, while fiscal stimulus pushes nominal yields higher.
Furthermore, I think there could be impacts on monetary policy-in particular, a Trump administration could have a more strained relationship with Federal Reserve officials. Trump says he would like to switch to a more rules-based monetary policy with less focus on zero interest rates, negative interest rates, and quantitative easing.
I still expect the Fed to raise interest rates in December, but that may be the last increase of this cycle. The unemployment rate is low, wages are increasing, and companies are having a hard time passing on those costs to the market. Profit margins are getting squeezed.
I am also concerned about high asset prices and elevated levels of debt. At best, these factors may keep interest rates low. At worst, asset prices could correct meaningfully at some point, and even trigger a recession. I don't see that on the near-term horizon, but the economy is slowing, and when the next recession eventually hits, it will be especially tough for monetary policy makers to address. With interest rates already low, they'll have limited ammunition.