The recent U.S. election results caught most pollsters and certainly most Canadians by surprise. The election of Donald Trump and the control of Congress falling to the Republican Party is a momentous event. After years of gridlock with no budgets being passed and battles over debt limits, the Republican Party has full control. What does this mean for Canada?
For those who may be apprehensive at the prospect of Trump as the U.S. president, a review of the U.S. Constitution should somewhat calm those concerns. The U.S. Constitution was written by individuals who did not want to have a governing system that placed control in the hands of any one person or concentrated group of people. A system with checks and balances spreads the authority of government into many hands. The President must have the support of Congress to put the legislation he proposes in place and likewise the President can veto legislation that he opposes.
A review of the Trump campaign reveals a clever strategy of using the press as a free promotional outlet. To be in the news daily, Trump made sensational and controversial statements that the press loved to report – and it worked. Since his win, the excessive rhetoric has largely disappeared and Trump has been acting, if we can say it, presidential. An impressive list of appointments to his Cabinet and advisors has given Trump the ability to draw on expert advice covering a broad range of governmental and economic issues.
Why did so many U.S. voters cast their votes for Donald Trump? He is not mainstream Republican, has no political background, has never held office and was opposed by the Republican establishment in his run for the Republican presidential nomination. However, to many voters, even those who found his campaign rhetoric unpleasant and disturbing, Trump represents change. Hillary Clinton was seen as more of the same and part of the Washington establishment, which was something they did not want.
What has caused this upwelling of dissatisfaction that saw states that were Democratic strongholds fall to the Republicans? Since the financial crash of 2008, the U.S. middle class has seen job opportunities shrink and returns on savings fall. The share GDP going to the corporate sector has grown while the allocation to labour has fallen. At the same time, Washington has been paralyzed by partisan politics and has offered no solutions. Why not vote for change and take a chance that Trump can deliver on at least some of his promises?
What does Trump mean for Canada? On the positive side, he has stated that approval for the Keystone Pipeline is high on his agenda. There is some cause for concern regarding his comments on throwing out NAFTA, the free trade agreement covering the U.S., Canada and Mexico. However, Trump’s complaints have been aimed at Mexico and in fact Canada, like the U.S, has lost significant auto sector production to Mexico. Any changes to NAFTA would require Congressional approval which is not likely without considerable debate, as the Republican Party has traditionally supported free trade. Trump is also advocating reduced levels of business regulation, lower corporate taxes combined with fewer loopholes and a significant expenditure program in fiscal stimulus – roads, bridges and other infrastructure.
The effects of these anticipated policies have benefited the U.S. economy which is now experiencing growth rates in excess of 3%. Canada on the other hand has not only been hampered by economic declines in Alberta and Saskatchewan due to falling energy prices, but is now going to experience fiscal drag as the recent federal government recently increased tax rates on family business owners (with the highest marginal rate being greater than 54%) along with Ontario’s new 4.5 cent/liter carbon tax in Ontario. We see both of these policies as a negative to economic growth resulting in Canada continuing to struggle to exceed 2% GDP growth despite experiencing one of the largest housing booms in history.
Always forward looking, equity markets have responded favourably to the impact of “The Donald” and his new business-friendly government south of the border. Deficit spending, stronger economic growth and higher energy costs will likely mean slightly higher inflation along with higher interest rates in general. Debt markets responded in haste resulting in a decline in bond prices which investors have not seen since the early 1990s.
With a generational low in interest rates being experienced this past summer, Northland Wealth’s investment strategy continues to emphasize alternatives such as direct lending, credit hedge funds and income producing real estate which all outperformed traditional fixed income this past year. Lastly, while equity markets have become somewhat fully priced, with investors moving out of the fixed income sector and large amounts of cash still on the sidelines, stock markets could still run further.