PACIFIC FUNDS, NOVEMBER 2016
Pacific Life Fund Advisors LLC, investment adviser to Pacific FundsSM Portfolio Optimization Funds and Pacific FundsSM Diversified Alternatives
The results of the U.S. presidential election are finally in, and we hope to offer some perspective for investors who seek to understand the potential investment implications of this result. We will examine the possible path for volatility across asset classes. Then, we will look at one theme brought out during this election that underscores deeper issues facing the global economy: growing inequality.
Uncertainty Breeds Volatility
Donald Trump's win yesterday was decidedly come-from-behind, with polls showing a fairly low chance even as the first polling places began to close. The uncertainty created by such a rapid turnaround means that markets have not priced-in the likely implications of this result. In the coming weeks, as evidenced by other surprise results like "Brexit" earlier this year, markets are likely to experience higher levels of volatility as investors digest the various policies that the incoming Trump cabinet may enact.
Headwinds to Trade
One major headwind to earnings in the U.S. and abroad is the potential renegotiation of trade agreements as promised by President-elect Donald Trump. Large multinational corporations with tight supply chains depend on goods from across the globe, and even a brief pause would negatively impact earnings and stock values. Likewise, emerging markets are likely to face challenges as countries such as Mexico and China have been frequent targets of Mr. Trump's anti-trade rhetoric. But like Brexit, overreaction to this election result may drive equities into oversold territory before the market can really assess Mr. Trump's intended policy and legislative agendas. In addition, the market must assess the chances of those passing through Congress, now controlled by Republicans, many of whom support free trade (as do most of President-elect Trump’s current economic advisors).
Uncertainty in Bonds
With more volatility, bonds should provide cushion with U.S. Treasuries continuing to act as the safe-haven1 asset. We would remind readers of the result when Standard & Poors® downgraded the U.S. credit rating in 2011, and Treasuries subsequently rallied. However, President-elect Trump has also indicated a willingness to utilize fiscal stimulus to help rebuild American infrastructure, which may indicate both higher deficits and higher Treasury yields over time.
The recovery from the recession of 2008 has proved a major challenge for the U.S. economy. When looking at household incomes, many U.S. consumers have not yet recovered to their pre-crisis earning levels, leaving a growing gap between the median household and wealthier asset-owners who have seen their net worth expand through growing asset values. This remains a challenge for policymakers across the board. The Federal Reserve is looking to normalize interest rates without choking off the U.S. consumer. Much of the anti-globalization sentiment may trace back to growing frustrations concerning the differing fortunes experienced in the current expansion. The ways in which President-elect Trump chooses to tackle the issue of inequality in personal wealth may define how his presidency impacts global markets and how he is remembered in history.
1 A safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence, providing less exposure to losses in the event of volatility and/or market downturns.
This publication is provided by Pacific Funds. These views represent the opinions of the portfolio managers at Pacific Life Fund Advisors LLC and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. No forecasts are guaranteed. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions expressed herein are based on current market conditions, are as of November 9, 2016, and are subject to change without notice.
All investing involves risk, including the possible loss of the principal amount invested. The value of a fund’s holdings will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Corporate credit securities involve risk of default on interest and principal payments or price changes due to changes in credit quality of the borrower, among other risks. Investments in emerging markets are subject to regulatory, political, economic, market, and other conditions of those markets, which can make these investments more volatile and less liquid than U.S. investments. Equity securities tend to go up or down in value, sometimes rapidly and unpredictably, in response to many factors, including a company’s historical and prospective earnings, the value of its assets, general economic conditions, interest rates, investor perceptions, and market liquidity.
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