Donald Trump will become the forty-fifth President of the United States after a hard-fought campaign. Republicans now control the Presidency and both houses of Congress. Trump is a populist who campaigned on change, and NPP believes a change in the investment environment has occurred. The President-elect has highlighted tax cuts and increased infrastructure spending as two of his main goals. While these policies may help the economy in the intermediate term, they would also lead to higher deficits, at least in the next few years. Higher fiscal expenditures are generally inflationary. NPP thinks it likely that interest rates bottomed earlier this year shortly after Brexit. We suspect the great bond bull market that started in the early 1980s is coming to an end. Bond yields will probably grind higher as price inflation starts to increase and deflationary fears moderate. In this environment, we have been favoring shorter-duration bonds, TIPs, and floating-rate bonds. We have kept the duration of the portfolios relatively short and plan to continue doing so. We doubt that rates will rise as precipitously as they have the past two weeks. Nonetheless, we think the direction is up. It is a near certainty that barring something completely unforeseen, the Federal Reserve will raise interest rates next month.
Trump’s focus on fiscal stimulus, eased regulations and the inflationary consequences of such actions are bullish for the financial services sector. In fact, it has been the top performing sector since he became the President-elect. NPP is looking to reposition our client’s portfolios toward businesses that will benefit most from this new paradigm. In addition to financial stocks, many industrial and information technology stocks should benefit from the new environment. Safer stocks such as utilities are likely to underperform.
We think Trump is on the margin bullish for the stock market in the short-term. This call is not without risks though. Should interest rates rise too quickly, it could snuff out an economic acceleration before it has a chance to start. Trump made immigration reform and trade protectionism a mainstay of his successful election bid. NPP does not expect him to follow through with everything he said. However, if he were to start enacting putative tariffs across the board and put a halt to immigration, it would be bad for the economy and the markets.
There are both upside and downside risks in the first three to six months of his Presidency. NPP is modestly more positive on equity markets now that he is President, but this would likely have been the case no matter who won. The markets hate uncertainty and so knowing the result is just as important as who actually won. Moreover, we are entering what has historically been the best time of the year to be invested.
Happy Thanksgiving from New Potomac Partners