BOSTON, NOV. 15, 2016….The election of Donald Trump underscored the futility of making predictions about world events and about market reactions to those events, the head of the state’s pension fund and investment professionals said Tuesday.
Trump’s victory and the market rally that accompanied it followed British voters’ collective decision to exit the European Union, known as Brexit, which ran contrary to pre-vote prognostications.
“The Trump victory was certainly a surprise. We all know that. But what was also surprising was that the equity markets rallied even after his victory,” said Michael Trotsky, the executive director and chief investment officer of the Pension Reserves Investment Management.
At a meeting of the investment advisory committee, Trotsky said, “What we’ve learned over the past several months beginning with the Brexit vote in June and confirmed last week was, number one: nobody can predict what’s going to happen. And number two: Nobody can really predict exactly how the markets will react. We have to keep this in mind.”
Trotsky said “on the flip side” bonds, which provide financing for governments and institutions, have been sold off “significantly.”
Peter Monaco, managing director of Raptor Group, said despite the rallying market, uncertainty and risk lie ahead with Trump in the White House.
“The equity markets in particular… have been so starved for growth that it will grab on to anything that is suggestive of the potential for greater growth ahead,” Monaco said. He said, “I think that as the equity market sometimes does over the short-term, it’s being a little myopic and ignoring firstly the enormous uncertainty ahead. And it’s also ignoring the very real potential negatives. He wants to spend a lot more, but it’s unclear how we pay for it.”
Trotsky said markets appear to be focused on the potential for tax reform, stimulus spending, infrastructure and deregulation for boosting growth while paying less attention to the potential for trade restrictions, tariffs and new immigration policies.
Constance Everson, managing director of Capital Markets Outlook Group, said there appears to be a shift toward “something else as a long-term duration asset” instead of bonds, which will mean “a long-term headwind for bonds, and a tailwind for whatever asset class is going to receive those funds.”
Everson described the equity rally as “narrower” than before the election, with gains by banks, the pharmaceutical industry and construction material companies. At the advisory committee meeting, consensus was apparent on the invetable – the future is unpredictable.
“You need eyes on all sides of your head, and also some positioning for an outcome that might not have seemed apparent in the early days,” Everson said.
The pension fund, which now stands at about $63 billion, has outperformed peer funds recently. Eric Convey, a spokesman for the fund, said staff has been unable to find any public fund of the same size or larger that outperformed the Massachusetts pension fund in the fiscal year that ended June 30. In the quarter that ended Sept. 30 the fund was up 4.3 percent, the pension fund reported Tuesday.
Pension fund staff attributed the relative success to investments in long-term Treasury bonds and private equity. The fund has been slowly shifting its asset allocation away from global equity.
A candidate who never held elected office and was written off early on by the commentariat, Trump’s broad vision for the country includes greater border security, expulsion of people in the country illegally, an “America first” stance on international trade and treaties, and infrastructure spending at home.
Monaco said he is “very worried” about trade under a Trump administration.
“Part of me wants to believe that at the end of the day he’ll act a little more pragmatically than he talked, but the thing that really seemed to appeal to a lot of those that voted for him is immigration and trade-related,” Monaco said. He said, “I hope someone will tell him over the last 30 years, global trade has driven something like 50 percent of cumulative global [gross domestic product] growth.”
Railing against alleged currency manipulation by China and the lack of respect Russia has shown for the United States under its current leadership, Trump repeatedly made a big border security promise during the campaign that the nation would build a wall on its southern border and Mexico would pay for it.
“Hopefully he won’t kind of tip it toward an atmosphere of U.S. protectionism that begets a negative response from others,” Monaco said.
“Except that that’s been his position,” Treasurer Deborah Goldberg interjected.
A Democrat who supported Democrat Hillary Clinton in the election, Goldberg pointed to Trump’s selection of Steve Bannon – a hero of the alt-right – for a top White House advisory post as an indication of where Trump is headed. Goldberg also discounted the selection of Reince Preibus, the Republican National Committee chairman, as Trump’s chief of staff.
“I think the appointment of Bannon sends a very strong signal. I think Reince Preibus is merely the scheduler and the guy at the door,” Goldberg said at the meeting.
Copyright 2016 State House News Service