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Trump Pulls A Stunner. What Does This Mean For Your Portfolio?

Election Day has finally come and gone with one final twist—a surprisingly easy Trump victory. While markets were down over 800 points in the wee hours of the morning, they have since stabilized at essentially flat-to-up compared to yesterday. This puts the market up over 2% for the week and dispels fears of a market meltdown with a Trump result. We’re not saying volatility is gone, particularly as the Fed meets in December. But, using history as a guide, the political backdrop for equities looks favorable. A Republican President and Congress has historically produced the best annual returns for any combination of government (up 15% per year). Additionally, the year following elections has historically seen annual gains of 5%.

What truly matters for markets, however, are economic fundamentals and prospects for corporate profit growth.  By all indications, the U.S. still has an economy on solid footing. Jobs are growing at a heathy clip, consumer confidence is strong, wages are picking up, housing has no signs of stress and earnings have recently perked up after nearly a year and a half of no growth.  3rd quarter results have come in better than expected and, perhaps more importantly, 2017 expectations continue to call for double-digit growth. 

We know we just rambled about where we are without answering the big question of the day—What does a Trump win mean for the economy and your portfolio? This is a more difficult question, but we’ll give it our best based on the current state of affairs. Trade policy is a big wildcard (our guess is his stance softens), but generally the macroeconomic picture could improve as we see corporate tax reform (lower taxes, better for profits), repatriation of foreign cash held by multi-nationals (good for domestic spending and state tax revenues) and the removal of permitting delays for many infrastructure projects that are shovel ready (additional jobs). These things, taken together, could mean better corporate profits and, thus, higher equity levels as valuation hurdles are solved.

On a more granular level, here’s how we see the impact from the Republican sweep:

Winners

  • Defense – A Trump win means additional defense spending, potentially as much as a 15% uptick.
  • Financials – Less regulation from a Republican Congress coupled with the prospects of additional economic growth are likely to benefit the sector.
  • Pharma and Biotech – Pharma/biotech companies have been punished on prospects of a Hillary win. The sector got a trifecta of good news. Prop 61 (limit on drug prices) in California was defeated, Hillary lost and Republicans kept Congress.
  • Oil/Gas Services and MLPs – Trump is in full support of drilling and fracking via less regulation. There are more than 20 stalled pipeline projects that could get reignited right out of the gate. And while this may not help the price of oil directly as more supply comes on line, it should benefit jobs (people have to build pipelines) and the infrastructure providers such as MLPs.

Losers

  • Health Insurers and Hospitals – The Affordable Care Act will likely be replaced with an alternate plan. We don’t think it will be completely removed (it’s hard to take away insurance and subsidies from millions), but we could see the individual mandate repealed, coupled with lower subsidies. This would mean less people with insurance using services.
  • Renewable Energy – The Clean Power Plan will not be implemented, environmental regulations will likely be relaxed and some renewable tax credits may be removed.
  • US Multi-Nationals – Last night was more of a mixed bag for multi-nationals, as more restrictive trade policies could raise the cost of doing business while repatriation of foreign cash would be a windfall.   

This is how we see the world after a stunning and contentious election season. And while things will certainly play out with twists and turns along the way, these are the factors we’re considering while investing in today’s world. It’s worth remembering no matter what happens in the short-term due to the sound-bite of the day, fundamentals drive long-term results. We believe diversification and focus on consistent, stable income are the keys to long-term success.

Please reach out with any questions. We’re always here to help.

Regards,

The Investment Committee


 

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