Head of Global Asset Allocation Strategy Tracie McMillion discusses the short- and long-term investor implications of the election outcome and potential Federal Reserve action.

Transcript: The Election, The Fed, and Your Portfolio

Presenter: Tracie McMillion, CFA, Head of Global Asset Allocation Strategy, Wells Fargo Investment Institute

Title graphic: A Republican Government

Americans have chosen Republican Donald Trump to be their next president. Additionally, Republicans maintained their majority positions in the House and Senate. This "Republican Sweep" is typically considered a good combination for U.S. large company stocks.

Investors are initially focusing on the market-friendly aspects of Mr. Trump's policies. With both a Republican president and a Republican congress, tax reform and repatriation may be more likely; however, Mr. Trump's spending plans may face opposition from a Congress that tends to be more fiscally conservative.

Title graphic: Next Up, the Federal Reserve

Despite an initial sell off on election night, investors' response to Mr. Trump's victory has been generally positive. Relative market calm has paved the way for additional Federal Reserve action. Bond yields have been rising in expectation of a December rate increase. We believe there will be one rate increase this December or early next year and at least one additional increase in 2017, as the Fed maintains its cautious approach to raising interest rates.

The one caveat is that inflation may creep higher than we're currently forecasting, especially if Mr. Trump is able to enact more of his spending plans than is currently expected. Higher inflation may prompt the Fed to increase interest rates more aggressively than we or the markets are currently projecting.

Title graphic: Investor Implications

  • First, it's important to remember that we do not anticipate a change to the positive direction of the U.S. economy. We expect U.S. and global growth in 2017 to be slightly higher than in 2016, with job gains and housing market strength to continue.
  • Secondly, a cautious Fed will likely continue to support the recovery. Any fiscal spending would complement the actions of the Federal Reserve and should be a positive for the U.S. economy. Central banks in other developed markets should also keep interest rates very low.
  • Lastly, geopolitical events and uncertainties, particularly surrounding trade and regulatory policies, could inject volatility into the U.S. markets in 2017. To help mitigate the risk of market downturns, investors should continue to hold a globally diversified portfolio including cash alternatives, fixed income, equities, real assets, and alternative investments. Episodic volatility may present opportunities for investors to rebalance to their long-term target weightings.

We believe that investors should keep their focus on their investment goals, risk tolerance, and time horizon. Historical relationships between asset classes can help guide longer-term investment decisions, while tactical adjustments may help to manage risk in the shorter term.