Markets don’t like surprises, so it’s no surprise that a Trump victory has been met with market volatility, a classic risk-off reaction. With a full slate of important elections and referendums to follow in Europe—the next test will come on December 4 with the Italian constitutional referendum—implications of potential surprises for investors are worth considering. A myriad of related market risks including slow economic growth and rising geopolitical tensions suggest that investors should rely on broad portfolio measures for defense. These include tight liquidity management and diversification into defensive asset classes to provide ballast to portfolios to meet spending, capital calls, and other liquidity needs, as well as to take advantage of opportunities that develop during bouts of elevated volatility. Overall, we remain neutral on risk assets, but believe investors should be diligent in maintaining an appropriate level of liquidity and defense.

The market reaction in early trading has been similar to what market activity leading up to the election foreshadowed. As Trump’s standing improved in the polls, equities fell broadly across the globe and gold rose. Currencies were mixed, with alternative reserve currencies, particularly the yen, generally strengthening versus the US dollar, while those with the closest trade relationships, particularly the Mexican peso, saw their currencies fall. Commodity markets have been mixed given many different crosscurrents. US Treasuries, which rallied modestly pre-election, have sold off, with the yield curve steepening.

With the exception of a weakening US dollar and steepening yield curve, the market reactions seen so far are typical risk-off responses and should be expected to at least partially reverse in the coming days as markets adjust to the significant uncertainty in what a Trump victory portends for the US and global economies as well as for capital markets. Why partially and not fully reverse? One never knows, but the uncertainty of what Trump stands for, what he will be able to achieve with or without the cooperation of Congress, and the reaction of foreign governments to Trump’s protectionist policies are important wildcards. For example, while a President cannot increase tariffs without congressional approval, there are certain cases in which he can withdraw from trade agreements or impose offsetting duties without the approval of Congress. Maintenance of a risk premium in some assets seems likely, as has been the case in the pound sterling’s reaction to Brexit. At the same time, Republican control of Congress and the presidency raises prospects for a coordinated approach to growth policies including tax reform.

Trump’s main election planks—trade protectionism, tighter immigration controls, higher infrastructure spending, and corporate and income tax cuts—all have the potential to elevate inflation. Higher yields and a steepening yield curve are likely to persist as a higher term premium seems sensible. One somewhat surprising market reaction is the US dollar weakening despite the risk-off environment, although expectations of higher inflation support a weaker US dollar. Still, the US dollar could rally under a couple different scenarios: (1) if the Fed tightens faster than the market expects in the wake of rising inflation pressures or (2) if the economic impact of a Trump presidency and Republican-controlled Congress turns out to be strongly negative or strongly positive.

The momentum of populist policies is on the rise and risk premiums may be too. Making sure that portfolios are aligned with risk tolerance and return objectives is critical in allowing asset owners to withstand volatility and to take advantage of opportunities that may arise. Periods of volatility surrounding elections and referendums should be expected, making diversification and liquidity provisioning a standard part of normal operating procedure for responsible stewards of capital.