Now that the election is over let's discuss what impact the Trump presidency might have on the economy and the markets.
According to the Wall Street Journal, there is a good chance of better economic growth. GDP, currently around a weak 1.5 percent could average 2.5 percent in mid 2017 and 2018. What policies would cause this?
Hopefully, Mr. Trump's words on trade will moderate because trade wars benefit no one.
Higher growth, if it happens, will bring changes to interest rates and inflation. Political views aside, fewer immigrants, especially illegal immigrants means less low priced workers competing for jobs. This too will cause wages and inflation to increase over the next few years. 10 year Treasuries, below 2 percent prior to the election, could move to 3 percent or higher. Inflation of 1.5 percent could move to 2.5 percent. None of these is overly negative events. For too many years the slow growing economy and artificially low interest rates has hurt savers and conservative retirees. A modest increase in interest rates is overdue.
Since higher rates are a negative for bonds, it is time to be cautious. We will keep maturities short and may add to positions in commodities, variable rate bonds, and Treasury Inflation-Protected Bonds (TIPS).
Due to anticipated GDP growth, we are positive on stocks but keep in mind that the overall market is no longer inexpensive. Active management will become more important relatively to indexing going forward.