The votes have been counted and America has a new president-elect: Donald J. Trump.

After an initial selloff, global markets rebounded as uncertainty about a Trump presidency gave way to a focus on fiscal stimulus plans that could boost growth. However emerging markets are still feeling pressure due to expected changes to trade policy under President Trump, and U.S. Treasury yields rose as the market anticipated that his fiscal spending plans could spark inflation. In the coming weeks, the markets will be keeping a close eye on how the administration takes shape and what issues it prioritizes.

Republicans Maintain Control of Congress

As discussed in previous commentaries and illustrated in Figure 1, who sits in the Oval Office matters less than his or her ability to drive policy through Congress. Republicans maintain control of Congress, which is the most bullish backdrop politically for equities and can also help advance the president's legislative priorities.

What We'll Be Watching

In the early days of Trump's administration, we will be watching a few areas such as trade, tax reform and monetary policy that could have an impact on the economy, the markets and how we position portfolios.

Trump's rhetoric and proposals regarding foreign policy issues such as immigration and trade could have a negative impact on economic growth, leading to potential currency wars and strained relations with foreign leaders. There is also uncertainty with respect to the direction of monetary policy, given that Trump has been vocal in his desire to replace Federal Reserve Chair Janet Yellen. Rather than a gradual normalization process that markets have been expecting, there could be a push higher in interest rates if the Fed leadership changes. Trump has advocated for lower personal income tax rates, a repatriation of foreign corporate profits and lower corporate taxes, which could boost economic output in the short term. It remains to be seen whether policymakers will have an appetite for a grand bargain or a more modest tax reform package, but there will certainly be some tax planning and investment implications as a result.

Beyond the Election

Regardless of who sits in the White House, we continue to believe that the U.S. economy will grow at a modest pace. Equities still have room to run in this late-stage bull market and bond yields will gradually move higher. However, we will continue to monitor policy decisions and evaluate their potential impact on the business, economic and stock market cycles.

We have positioned portfolios for this stage of the economic and business cycle, with a modest overweight to equities, an underweight to bonds and a mix of diversifiers to help smooth out the ride. We are prepared to take advantage of pricing dislocations that may transpire in this period of uncertainty, and may consider leaning in and adding incremental risk to portfolios. Given Trump's more protectionist trade philosophy and our expectation for a continued strong dollar, we may emphasize our bias to domestic equities over international, increase our exposure to small cap stocks given their reliance on domestic revenues, and maintain our underweight to emerging market equities. A change in the tax code to lower marginal personal income tax rates could also have some impact on the attractiveness of municipal bonds compared to taxable bonds and have implications for wealth planning strategies designed to minimize taxes.

While the election outcome may have yielded different results than many expected, investors should not abandon their investment plans. Similar to what we saw following the Brexit vote, reacting to geopolitical events can be detrimental to longer-term performance. It will take some time before the dynamics of this new political landscape take shape, but we remain ready to make active investment and wealth planning decisions based on market fundamentals, a long-term outlook and wealth management expertise.

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