The most divisive and chaotic Presidential election campaign in recent memory is now over. Donald Trump emerged as the victor and now the markets must digest the news. Here are my impressions and analysis of what investors could expect moving forward.
Conventional wisdom was that Hillary Clinton would be the 45th President and that at least one house in the Congress would remain in Republican hands. Many investors have felt comfortable with a divided government.
It was predicted that if Donald Trump won the election, the stock markets would move violently lower. On the night of the election, as the results poured in and it looked more likely that Donald Trump had a chance of winning, the stock market futures sold off in excess of 850 points! As this possibility became a reality, the markets started to determine winners and losers of a Trump presidency.
Cause for Optimism?
There was already some optimism built into the stock market outlook for 2017. The Standard & Poor’s 500 Index (S&P 500 Index) has had declining earnings for the past five quarters in a row. The Earnings Per Share growth (loss) for 2016 is estimated to be -0.2%, which is disappointing, but reflects the nagging drag energy has had. Upcoming 2017 is anticipated to be a different story. The consensus view points to a recovery of 6.1% in earnings with robust revenue growth because of higher wages, low gas prices and personal wealth gains (largely from the stock and housing markets). (Zacks Investment Management Newsletter, November 9, 2016)
However, there seems to be more optimism about the potential for even faster growth in the economy. This perception results from the view that there will be greater spending on infrastructure, lower tax rates, less regulation and, in general, a more business-friendly climate. That can be offset, in part, by the fear of a disruption in foreign trade resulting from challenging established trade agreements and a tougher stance on immigration.
The following is a list of sectors that can be affected by a Trump Presidency and a Republican Congress.
Energy – Expect fewer regulations for big oil companies and reduced subsidies for alternative energy. I expect more permits for development on federal lands, more drilling, more pipelines, and more coal, which could also benefit some railroad companies. However, some of the energy stocks may not perform as well because the potential additional supply could cause the price of oil to go down and stay down for an extended period of time.
Financials – There has been a very strong rally in this sector as soon as it was announced that Trump won the presidential election. He has promised to freeze new financial regulations and roll back some of the older ones including the controversial Dodd-Frank Act. This would likely favor smaller banks, which would benefit more from reduced regulatory costs. In addition, if interest rates move higher (see below), banks will enjoy higher net margin interest, which is crucial to their profitability.
Manufacturing – This will be an interesting sector to watch. On the one hand, manufacturing could be hurt with Trump’s tough talk on trade, including tariffs (particularly on imports from China) and tearing up NAFTA. It could be just tough talk and the start of a negotiation. On the other hand, lower energy prices could help manufacturing companies reduce costs.
Infrastructure – Most people agree that America needs to revitalize its ailing infrastructure. I expect big spending in this area. This would probably lead to more jobs, faster economic growth and a higher deficit, which could lead to higher interest rates. Trump has mentioned that he would have companies invest their own money to fund some of these projects, which would lead these companies to charge the users (i.e., toll roads) so the projects wouldn’t be all funded by the government.
Health Care – Trump wants to repeal the Affordable Care Act and allow individuals to buy policies directly from insurers that would likely be cheaper, but may not provide equally complete coverage. A centerpiece of his plan is allowing insurers to sell policies across state lines to promote competition. Fewer restrictions may bode well for health care and pharmaceutical companies.
Technology – These are worldwide companies. Since the election this sector has sold off for three reasons:
Bonds – Interest rates have risen fairly dramatically since the election. One could say it was a knee-jerk reaction to an unexpected result. The bond market has quickly re-priced bonds to reflect a new reality. It appears that the new President and Congress will agree to new fiscal measures that will complement monetary policy and fuel more growth in the economy. The consensus view is that this will in turn fuel inflation and, hence, higher interest rates. This is bad for bonds that are interest rate sensitive, such as longer-dated Treasuries or high-quality corporate bonds (although in time this will be better for savers).
The level of optimism in the markets is surprising given the derision Trump faced from Wall Street and the U.S. Chamber of Commerce during the election. While markets have initially rallied, we will be measured in our approach and take our time to review potential opportunities as well as areas to avoid. When we make recommendations to adjust, where appropriate, they will be based not on knee-jerk reactions but on the expected fundamentals going forward.
Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks.
Past performance does not guarantee future results. Individual investor’s result will vary.
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David Urovsky is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1658535-120716
The question I am asked every four years: “Dave, how do you think that the upcoming presidential election is going to affect my portfolio?”
It’s a fair question, and I wish I had the proverbial crystal ball to provide an answer. But this year the crystal ball is a little cloudy. In the absence of the gift of foresight, there are indicators based on everything from past performance to old-fashioned prognostication.
The answer? Like it or not based on your political leanings, my research indicates that the markets fare better in a Democratic administration. The market is performing fairly well—and at least part of that can be attributed to the market’s presumption that Hillary Clinton will be our next president.
Despite her claims that she is not tied in to Wall Street, for the most part, the markets know what to expect from her. Like her or not, the markets definitely do not like uncertainty, so Wall Street is proceeding on the assumption that the Democrats will prevail in November.
Signs and portents of election results abound, and the stock market seems to have successfully predicted the next U.S. president in the past. In her February 2016 Kiplinger.com article “How the Presidential Election Will Affect the Stock Market,” Anne Kates Smith presents some interesting statistics to support this notion. She notes, “If the stock market is up in the three months leading up to the election, put your money on the incumbent party. Losses over those three months tend to usher in a new party.”
And old-fashioned prognostication seems to be an accurate predictor of election results when people back up their opinions with their hard-earned money. While I’m not advocating their use, prediction market websites abound, where people bet on the outcomes of a plethora of topics, from Oscar nominations to presidential elections. The outcomes of the predictions are thought to be more accurate than polls because people are backing up their opinions with their wallets. Reporter John Stossel and Fox News Producer Maxim Lott host one of the popular sites, www.electionbettingodds.com, which indicated on June 12, 2016 that Hillary Clinton had a 71.2% chance of winning the presidency, while Donald Trump had a 24.1% probability of winning.
The ascendency of Donald Trump as the Republican party’s candidate for president has created some churn for voters and political and economic forecasters. Not being a traditional presidential candidate — a politician with a strong political party affiliation, voting record and policy history — how Trump would form policy positions on the influencers on the stock market and corporate earnings, such as taxes, trade, healthcare, foreign affairs, is a matter for conjecture. And everyone is guessing.
Trump has not yet revealed enough hard evidence of his agenda to alleviate the enigma, but we know that his priorities cluster around social issues, tax reform, foreign trade, and healthcare reform. A repeal of the Affordable Healthcare Act and enacting competitive interstate health insurance sales would certainly be a game-changer in the healthcare industry and affect earnings and stock prices in that sector. Getting tough with our trade policies with China and lowering the corporate tax rate to create a more fertile domestic environment for U.S. companies would affect foreign trade and corporate earnings — and potentially strengthen some segments of the market and weaken others.
Back to the answer to your question about the affects of the presidential election on your portfolio: You and your portfolio are together for the long haul. History has proven that staying the course and making portfolio decisions for the right reasons (decisions based on fear and uncertainty are not sound decisions) are the bedrock of a strong portfolio. As individual investors, we have no control over the politics, climate, economy, and domestic and foreign events that affect the markets and corporate earnings. However, we can control oversight of our portfolios and accept the inevitability of change.
If you think now is a good time for a portfolio check-up, I’ll be happy to meet with you and discuss all of the topics that may affect your current and future situation.
David Urovsky is registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer, Member (SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice. Wealth Advisors Group is not an affiliate of Lincoln Financial Advisors Corp. CRN-1526180-061516
The views expressed are those of the author and not necessarily that of Lincoln Financial Advisors Corp. Opinions presented may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied.