Donald Trump's victory added a great deal of uncertainty to the market outlook.
Following his generally conciliatory victory speech in the early hours of Wednesday morning, US equity markets rebounded along with the dollar, while US Treasury yields rose more rapidly.
Emerging market equities pulled back. On net, the bottom line is that, for most investors, election week 2016 saw some nice stock market gains.
However, it is worth asking whether investors are, yet again, underestimating uncertainty. There are at least three issues worth considering:
First, while Trump's tone has been conciliatory since the election, his many changes of position during the election campaign beg the question of how aggressively he is going to pursue his stated agenda.
In a speech delivered at Gettysburg in late October, he promised on his first day in office to direct his Treasury Secretary to label China a currency manipulator and announce his intention to renegotiate or withdraw from NAFTA.
He also planned to begin to build a wall on the Mexican border and start rounding up more than two million illegal immigrants with criminal records. Needless to say, the Chinese, Mexicans and Canadians would not take kindly to any of this and an early, all-out trade war could have significantly negative implications for both the US and global economies.
It may be that on these issues, and others such as the Affordable Care Act or the Iranian Nuclear deal, the new president takes a much more pragmatic approach than he espoused on the campaign trail. However, with such a wide range of issues, it is not certain that he will do so in all cases. And, as with all new presidents, it is also not clear how he might react to the various crises that will inevitably emerge on his watch.
A second uncertainty concerns the degree of cooperation he will get from Congress. On the one hand, the Republican party has never been more dominant in American politics. It controls the White House, the Senate, the House of Representatives, 33 of the 50 state governorships and 68 of 99 state legislatures.
Moreover, by avoiding confirmation hearings on President Obama's nominee to the Supreme Court, it has ensured that at least five of the nine Supreme Court justices in 2017 will be Republican appointees.
However, many in the Republican establishment fought hard to try to ensure that Donald Trump was not their nominee. Apart from personal differences with Trump as a candidate, they tend to be far more in favour of free trade and against big deficits than the president elect. Will they acquiesce to his agenda or try to water it down or block parts of it entirely?
FEDERAL DEFICIT IS RISING
A third uncertainty surrounds the impact of Trump's fiscal policy proposals on the economy and financial markets. These proposals are predicated on the idea that the US economy is seriously underperforming its potential and is in need of a big fiscal stimulus.
However, there are two problems with this viewpoint. First, the federal budget is already dangerously out of balance. Second, the economy is already at full employment so that stimulus applied now is more likely to stoke higher inflation and interest rates than greater real GDP growth.
The federal deficit is already rising, growing from 2.5 per cent of GDP in fiscal 2015 to 3.2 per cent in 2016. The Congressional Budget Office estimates that, under current law, the national debt will grow from 77 per cent of GDP in fiscal 2016 to 86 per cent in 2026.
However, in a September analysis of Trump's fiscal plans, the Committee for a Responsible Federal Budget estimated that they would push the debt to 105 per cent of GDP by 2026 if fully implemented. Most of the cost of these plans comes from large proposed tax cuts for both corporations and individuals, although increased defence spending also has a sizeable impact.
In recent years, low interest rates have reduced the interest cost the federal government has to pay on the national debt and have somewhat numbed investors to the serious long-term threat it poses. However, it does not take a brilliant mathematician to see that if long-term Treasury rates return to more normal levels, financing this debt will absorb a much greater share of federal revenues over time.
In the 50 years before the financial crisis, the average interest rate paid on federal debt was 5.6 per cent, but the average debt-to-GDP ratio was just 37 per cent. A 5.6 per cent average interest rate on a debt equal to 105 per cent of GDP would be ruinous.
The truth is that boosting the federal debt to these levels is fiscally reckless.
Equally worrying is that this is a completely inappropriate time to engage in further fiscal stimulus. The US economy is, for all intents and purposes, at full employment. The overall unemployment rate is 4.9 per cent - lower than it has been 77 per cent of the time over the past 50 years - while the short-term unemployment rate is lower than it has been 98 per cent of the time over the past 50 years.
In this economy, a shock boost to aggregate demand through tax cuts would likely boost inflation and imports more than domestic production, since the US economy is supply-side constrained. Higher inflation and bigger deficits should lead to higher interest rates - particularly if the Federal Reserve perceives inflation risks as having risen and so raises short-term interest rates.
The American economy is more like a healthy tortoise than a sickly hare. Immigration reform designed to increase skilled immigrants or policies that boosted productivity growth might give the economy the ability to run faster. However, in the absence of this kind of supply-side effort, boosting aggregate demand to make the tortoise run faster would mainly result in over-heating.
In the short run, a pickup in inflation and growth could be positive for US stocks. However, in the long run, resorting to extra fiscal stimulus from a heavily indebted government in a full employment economy would be dangerous.
David Kelly is chief global strategist at JPMorgan Asset Management.