Much like the June BREXIT vote in England, conventional wisdom, the media, pollsters and the markets were wrong about the outcome of the U.S. Presidential and Congressional elections. Late on election night, when it became clear that Trump would indeed pull off an upset victory over Hillary Clinton the stock futures plunged 5%. However, the market reversed course after Trump gave an acceptance speech that wasn’t combative and focused on his campaign promise to grow the economy, which will be aided by a Republican sweep of both houses of Congress.
The markets had been anticipating a Clinton win, which would have represented a continuation of the status quo. By contrast, Trump’s victory is a significant break from the past eight years, to a pro-growth and pro-business environment, which in turn, should lead to much higher GDP growth. The last eight years of 2.1% annualized GDP growth has been a sub-par by historical standards.
In the aftermath of Trump’s upset victory, the markets staged a violent sector shift. Investors quickly changed course by selling stocks they held in anticipation of the status quo and purchased stocks that are perceived benefactors to Trump’s promises of fiscal stimulus; lower taxes, regulatory reform, and energy independence. Thereby, investors sold Technology, REITs, Consumer Staples, Utilities and bought Banks, Insurers, Biotech, Industrials, and Materials.
Trump’s pro-business agenda is being viewed as inherently negative for bonds because it could lead to stronger economic growth and renewed inflation. These fears have led to a decline in bond prices that have pushed bond yields higher at all maturities.
I believe in one sense that Trump’s victory has a component of the pre-election status quo, a strong dollar that favors investments in domestic companies over multinational ones. Dollar strength should continue if the economy achieves Trump’s 3-4% annual growth target, and investors should also expect higher inflation and a continued rise in bond yields. Higher bond yields should put further downward pressure on yield-oriented stocks like Utilities, REITs, Telecom and Consumer Staples.
Even though there seems to be post-election euphoria in the stock market, stocks just recently broke out of a 15-month sideways consolidation, a move that is usually bullish. In addition to entering a historically strong seasonal period for stocks, another factor to consider, according to Ned Davis Research, is a unified government of a Republican President and a Republican Congress is the second-strongest governing combination for real market returns over the past century. In the short-term, I would expect stocks to move higher in a choppy fashion as investors continue to reposition their portfolios based on the unexpected election outcome.
For our clients, we have begun to shift portfolios to sectors that should do well under a Trump Presidency and Republican Congress. Please contact me if you’d like to discuss how the changing landscape impacts your portfolio.
Thank you for your confidence.