Market Outlook – Election Response [VIDEO]

Chief Economist Scott Brown comments on the results of the election and the outlook for the economy.

November 9, 2016

Recorded November 9, 2016

What effect will the election have on the economy?

Transcript: Hi, this is Scott Brown, Chief Economist with Raymond James. I’m here to talk a little bit about the election, in particular the mechanics behind what went on Tuesday, as well as the economic outlook both near-term and perhaps a little bit longer.

When you look at the outcome here, it was a surprise, but not a shocking surprise. If you look at Nate Silver’s FiveThirtyEight Model, he had Trump with a one out of three chance of winning the presidency, and one out of three times, in fact, you would expect the outcome we got last night. Florida and Ohio – Ohio had certainly been in Trump’s camp. Florida and North Carolina were looking pretty close, flip-flopping a lot in the last few days. The big surprise here I think was Trump getting into Hillary’s firewall states – Wisconsin, Michigan, and Pennsylvania – that seemed a bit unlikely. But as it is, it is not just the presidency that was at stake, but also the Senate. The Republicans in the Senate were playing defense this year defending 24 seats, the Democrats defending only ten. Just a couple of weeks ago, it looked likely that the Democrats would pick up six seats. They only need four to have a simple majority. Instead, they only picked up one seat, so the Republicans now control the Senate and the House, as well as the White House. So Trump can get a lot of things done. Congress can get a lot of things done with the President’s approval now.

So what does this mean for the economy? Well, near term, the economy appears to have been in pretty good shape heading into this. We have seen solid gains in the job market. We are seeing wages picking up at this point. You’re seeing a lot of the benefits from low gasoline prices fading as gasoline prices stabilize. But if you get that nominal wage growth along with the overall job growth, that is very positive support for consumer spending. That is 70% of the economy. That is likely to continue.

The one area we have now is uncertainty coming out of the election. We don’t know what Trump’s cabinet is going to look like. We don’t know how good of a relationship he is going to have with Congress. We don’t know whether the Vice President, Mike Pence, is going to play a key role in the day-to-day operations. So there is a lot of uncertainties in the terms of specific economic issues that were promised during the campaign. One is infrastructure spending – that could be a little bit positive for the economy. Again, that may be a little bit difficult to get a lot of that through Congress. There may be some reluctance to spend a lot more.

On the other side, we are also looking at huge tax cuts, mostly at the high end, very similar to what we saw in the early years of the Bush Administration. Now that is positive for the economy. It is not quite as positive as if those tax cuts had been pushed down into middle incomes and below, where people are more likely to spend the money, but it is probably going to be a bit of a positive. The flipside of that is that you are now looking at a substantially higher budget deficit projection over the next several years. So more treasuries securities being issued. That means higher interest rates and the bond market, at least the treasury market, is reacting accordingly to that. We have also been seeing some weakness in the dollar as well and that relates to the issue of trade.

Now Trump has promised to renegotiate NAFTA, a lot of these other trade agreements – that is going to be very, very difficult. The one thing that the president does have control of is getting us out of these trade agreements. He can do that by himself; he doesn’t need approval of Congress. The way that process works is that the president would send a letter to the individual countries involved saying that we are going to withdraw from these agreements, and six months later, that would happen. NAFTA obviously is a big deal in terms of trade with Mexico. It is also a big deal in terms of companies in the U.S. that export. You think of companies like Caterpillar, Deere, Boeing, you can go down the list – I mean, these companies export a lot of machinery and goods to the rest of the world, even services to the rest of the world. If we get in a trade war, that can be very disruptive for global trade, at a time when global trade has already been slowing down over the last year. So that is a big, big concern, not just for the U.S. but the global economy as well.

The economy, as we have been saying, is relatively close to full employment at this point. We do have a little bit more slack in the job market. The Fed is still very likely to raise rates, we think, at this point, in mid-December – still very gradual as you look out over the next couple of years in terms of the pace of rate increases, perhaps two next year. I have been getting a few questions about whether Janet Yellen will resign. I don’t think there is any real call for her to resign, at this point, as Fed Chair. You could see the White House and Congress pressuring her to resign, but we think she is very likely to stay until her term ends in January 2018. So there may be some continuity there in terms of the Federal Reserve outlook. But again, looking at the Fed to gradually raise rates over the course of the next couple of years.

So all-in-all, a lot more uncertainty, I think. In the near term, you may see a little bit more caution in terms of consumer spending. People may be reluctant to increase their spending. Businesses as well, may be a little bit more reluctant to invest in new capital and equipment until things clear up. It may be a little bit bumpy in the economy over the near term. Ultimately, we think we are going to prevail through this. Again, there are a lot of uncertainties further down the road as you look to what the new administration will have in store and what their priorities will be in the coming year. Thank you.

This commentary was recorded on November 9, 2016. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material, is not a complete summary or statement of all available data necessary for making an investment decision, and does not consitute a recommendation. The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or any forecasts will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.

©2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC
©2016 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

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