It has been more than a month since the surprise results of the presidential election, and since Election Day the S&P 500 is up 3 percent, with many sectors gaining traction based on planned policies. President-elect Donald Trump may not be everyone’s cup of tea but so far the U.S. stock market is hoping for and expecting the best.
While the recovery since 2008 has been tepid, things have been improving for the U.S. So much so, that our Federal Reserve is anticipated to continue increasing our interest rates. The unemployment rate hit 4.9 percent, partially through employment but also because of a declining participation rate (less people wanting to find work). Wages are finally on the rise, with an increase of 2.8 percent and job creation outpacing new entries to the labor force. In short, President-elect Trump is inheriting a fairly healthy economy from President Obama.
According to long-term technical analysis, we are at the beginning of a long-term U.S. bull market. To put that in perspective, the last bull market ended with the 2000 crash of the tech bubble. While there can be short-term and intermediate downturns during a long bull-market (for instance, in the middle of the last bull market, Black Monday 1987, when the Dow Jones Industrial Average dropped more than 22 percent in one day), the overall trend is favorable to hold on or invest more. The good news is that if history repeats itself it looks like this secular bull market started in 2014 and still has a long way to go until it fizzles. For obvious reasons, I will go with the standard disclaimer that past results do not guarantee future returns and investing involves risk so nothing is guaranteed.
So what does Trump bring to the table that could help or hurt this recovery?
The main industries benefitting so far are financials, industrials and health care. Since the election they have moved up significantly. Financials were facing major headwinds with heavy regulation and low interest rates in a Democratic presidency. With Trump indicating a willingness to decrease regulation, many banks are breathing a sigh of relief and investors are putting money on the chances that margins will improve with less regulatory burden.In addition, many Trump plans are inflationary, which means interest rates will rise and financials are the biggest beneficiaries of higher interest rates.
Industrials are moving up on the promise of infrastructure spending and expected pro-manufacturing stance. Health care is down year-to-date but made a marked move up post-election. Hillary Clinton indicated a desire for a reduction in prescription drug prices if her candidacy was successful. Given Trump’s win and his desire to repeal or change portions of the Affordable Care Act (ACA), biotech and pharmaceuticals look to be in a better position under the Republican president.
Trump also has boasted other pro-growth policies, which include corporate tax cuts. Currently, the United States has the highest corporate tax rate (38.9 percent) of any of the 35 developed nations and third highest in the world. The trend in most developed nations is lower and Trump indicated during his campaign that 15 percent was his target, which would put us at the lowest rate with Ireland. Chances are he will not be able to put that large a dent in the tax rate, but it will most likely go lower and most agree that 20 percent would be a sweet spot. Corporate tax cuts could easily add 5 to 7 percent to profits annually going forward, which is a positive for the markets.
The downside of Trump’s plan are his trade policies. Starting a global trade war would be disadvantageous for all nations and could derail our economy. Companies that import and export — a majority of the S&P 500 — could face tariffs.
Small Caps (those companies with market capitalizations of under $2 billion), are benefitting from the incoming administration’s pro-business strategies, their limited international trade exposure and decreasing regulation.
The reality is the move forward under a Trump administration and Republican presidency will be a change but how much and in what direction is still to be determined by actions. No sectors or regulation changes are guaranteed, so cool heads and diversification are still key to winning in the investment markets.
*Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.
