Trader Talk: Now what? Markets digest Trump victory

An employee of a foreign exchange trading company looks at monitors displaying TV news of Republican President-elect Donald Trump as he gives his victory speech after U.S. presidential election at a foreign exchange trading company on November 9, 2016 in Tokyo, Japan.
Yuya Shino | Getty Images

Now what?

The markets are grappling with the reality of a Donald Trump victory, which includes:

1) Lower stock indexes, but some clear winners. A drop of 5 percent or so is certainly expected, and there is still the risk of a longer fat tail, but not all stocks are dropping. Defense stocks like Raytheon and Lockheed Martin are likely early beneficiaries. Copper is up 2 percent, along with Caterpillar and Vulcan Materials, a sure sign that infrastructure plays will likely rally as well.

2) Less regulation. Early beneficiaries are likely to be industries that were threatened with heavier regulation under a potential Hillary Clinton presidency. That would principally include pharmaceuticals, but it may also include banks and even oil stocks, since its possible that lower support for renewable energy could benefit Big Oil.

3) Emerging market stock under performance. Developing economy assets are likely to remain under pressure for some time on currency issues, and concerns over trade.

4) Flight to "safety" to currencies like the Japanese yen and the . Both those currencies did strengthen, though both gave back much of their gains. This may force central banks to lower rates even more, or in the case of the Bank of Japan, deeper into negative rates. The European Central Bank may extend its quantitative easing (QE) program, now scheduled to expire in March 2017.

5) Lower chances of a Fed rate hike. With volatility up, the chances of a rate hike in December by the Federal Reserve diminish, though most traders feel the Fed could still make a case for a rate hike—though likely making clear the "glide path" would be even more shallow than it had previously indicated.

Is a Trump victory that bad long-term? A recent Evercore ISI survey of investors found that 93 percent believe the markets would be lower a week after a Trump victory, but that six months out 47 percent believe the markets will be flat to up.

That's hardly a disaster.

Trump's pronouncements on trade are a big source of anxiety, but already this morning there are those arguing that a President Trump will be far more restrained. Here's a quote from Citigroup strategist Tobias Levkovich:

"Our sense is that while the rhetoric has been heated, we also think that various business people who are close to Donald Trump will restrain some of his non-detailed threats made during the campaign. Thus, some of the dire outcomes of projected 10-15 percent type market declines seem overstated to us and may reflect more politically partisan views."

And remember—in the last year, other events that were viewed to be disasters for the markets turned out to be long-term buying opportunities after dramatic short-term declines. Consider the following:

1) the Chinese yuan devaluation on August 24th of last year saw a 1,000 point drop in the Dow at the open, but two months later the S&P 500 Index was back to its prior levels and took off from there.

2) the January-February swoon, "the recession that never happened," saw the S&P 500 drop about 200 points in a couple weeks. Two months later, we were back to the old levels.

3) Brexit was a two day, stomach-churning event (the S&P dropped nearly 100 points), then rallied back.

Still, "buy the dip" may not be the right approach, at least not yet. Trump's isolationist and trade commentary will need to be clarified.

JPMorgan this morning echoed this concern, arguing in a research note that "investors might attempt to buy into the initial market weakness, but we would argue that one should reduce again on a potential bounce. US political scene is likely to remain highly fractured, business confidence, as well as consumer confidence, might take a hit and the risk premia on many asset prices might increase sustainably."