The Dow Jones Industrial Average rose about 8% between the day Donald Trump was elected and the day of his swearing-in as president of the United States. Is the “Trump Bump” sustainable? Here’s the case for the Trump Bulls; check out the Bearish scenario too.
Even before his inauguration as president of the United States, Donald Trump has had an enormous impact on investment markets. He’s triggered a rally in U.S. equities and a selloff in fixed income. But how to position your portfolio for what comes next depends in large part on your view of Trump’s presidency—whether you think his administration will succeed in implementing his economic agenda or not.
“If he’s successful we’ll see more of the same of what we’ve seen since November 8,” says Craig Fehr, investment strategist for Edward Jones. That suggests investors confident in Trump’s prospects should tilt towards risk assets, namely U.S. equities, starting with large-capitalization stocks in sectors sensitive to the economy. Mid- and small-caps would pop later in the cycle, and more dramatically, Fehr says.
Others advise a small-cap skew right away. “The pure play on Trump is U.S. small caps with an emphasis on financials, industrials, energy and materials,” says Jurrien Timmer, director of global macro for Fidelity Investments. Large caps could suffer from reduced returns on foreign operations in other currencies, he notes. Financials have been buoyed by the prospect of reduced regulation and higher interest rates; industrials would benefit from a prompt deployment of Trump’s promised US$1 trillion in infrastructure spending; and materials and energy would see a rapid revival in demand for commodities.
The assets to back off from under this scenario, Fehr and Timmer agree, would be bonds, which would lose value with a significant uptick in inflation and interest rates, along with defensive equities such as telecoms, utilities and consumer staples. The only fixed income that would hold up in this scenario would be TIPS, or Treasury Inflation Protected Securities, whose coupon rates track the rate of inflation, says Timmer. Other underperformers could include emerging-market stocks, which, while positively affected by any rise in commodity prices, would be vulnerable to further strength in the U.S. dollar, in which much of their debt is denominated.
Prior to the election, “Investors were resigned to many more years of secular stagnation based on a status-quo election outcome,” Timmer says. Trump’s upset changed all that, but the rally has been stalled in most sectors since mid-December, awaiting some indication of the administration’s actual performance. “At this point markets have gotten re-rated, but not for the full Trump scenario,” he says. “If you are in the Trump camp, the moves we’ve seen are not done. There’s another half to it.”
Personally, Fehr doesn’t believe Trump’s plans for tax reform and deregulation will be as fast and far-reaching as the markets are anticipating. “I don’t think it shoots the economy to 4% growth,” he says. “And I don’t think it’s an early-2017 story. I don’t believe [Trump’s] policies are dead in the water. I just don’t think they will be implemented as they are being advertised today.”
While Aidan Garrib, global macro strategist for Pavilion Global Markets in Montreal, likewise doubts the Trump administration’s ability to effect his plans in the time frame that investors’ widely expect, one area he thinks will get some traction is financial industry deregulation. Unlike his other policy pillars, this has wide support in the Republican-controlled Congress. Also, higher interest rates (beneficial to banks and insurance companies) represent one respect that the incoming administration and the Federal Reserve are pulling in the same direction. And finally, the very volatility that Trump brings to the market will positively affect banks with big trading divisions, by increasing the volume of transactions. For this reason, Garrib believes financial stocks like JP Morgan will continue to prosper after inauguration day.
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