The stock market action since the election results is revealing in itself. Faced with the potential of an entirely new agenda by the president-elect, who can neither be categorized nor predicted, Wall Street is floundering on where and what to invest their money.
Have you heard the expression “attempting to put a square peg into a round hole?” That’s exactly what is going on within the markets right now. As a result, traders are dumping stocks and sectors that have proven to be great performers over the last eight years or more, fearing new Trump policies will result in future losses.
In exchange, they are buying unloved sectors that have languished under the Obama Administration. Commodity stocks, health care, biotech, some industrial plays, aerospace and financials seem to be the place to be. Suddenly dividend stocks, real estate investment trusts, and other high-yielding plays like utilities, are being sold. Gold and gold stocks, which have been the life-blood of speculation this year, are no longer shining.
These moves would be understandable if the underlying trends were based on anything more than a hope and a prayer. Those who are chasing these areas are basing their purchases on Donald Trump’s campaign promises. As you may recall, the president-elect has promised to spend upwards of a trillion dollars on infrastructure. Everything from hospitals, to roads and bridges has been mentioned as possible construction targets.
So, investors are reasoning that Infrastructure spending will require a lot of basic materials and metals. Things like copper and steel would be consumed in substantial quantities. Some construction and industrial companies would benefit.
But a trillion dollars in spending would cause the deficit to balloon. It would most likely mean that bond holders would demand higher interest rates than they are now getting. All this spending would mean the Fed might need to raise interest rates faster than investors expect in order to head off any inflation fears. As a result, interest rates have spiked and this year’s popular interest rate plays are being sold.
On the regulatory front, “The Donald” is thought to be less likely to increase regulations on the banking sector or institute price controls in the pharmaceutical and biotech industries. Additional regulations under a Clinton presidency have cast a black cloud over these sectors for 18 months. Yet the lofty price action in these sectors is already discounting much more good news than is apparent at this time.
Given that President-elect Trump has promised a “ take the gloves off” approach to certain states that sponsor terrorism, military and aerospace seem a good bet for additional government spending as well. Overseas stocks are taking it on the chin as investors fear the worst once Trump starts his trade war. Is this really wise?
The Republican Party has made a clean sweep of the White House as well as the House and Senate. So, investors are also trying to discover what areas made money during past GOP administrations. All of the above would make sense, in my opinion, if Donald Trump was a typical establishment- politician that has adhered to conservative principals throughout his life. He is not.
Don’t forget that the majority of his party is okay with corporate tax cuts but would dig in their heels at any additional government spending. Trump, too, has made enemies with the very Republican legislatures whose backing he would need to accomplish even some of his spending ideas. Clearly, he is going to need Bernie Sanders and the Democratic Party to pull off any fiscal spending program at all.
Trump is as much a Democrat as he is a Republican in many ways. He has never served in elective office. We have no idea how and in what form he will deliver on his campaign promises, if at all. He is given to hyperbole, so separating fact from fiction and investing accordingly, without further data, is not a good idea. The problem, however, is that Wall Street thinks they know the answers. I believe Donald Trump cannot be pigeon-holed, nor his policies predicted at this time.
That does not mean that creating a viable investment portfolio for the next four years is impossible. It is just too early to determine what should and should not be included in that process. As Trump creates his cabinet, learns who he can count on (and who he can’t) within his own party and fine-tunes his direction, the prudent investor should just sit tight.
So far, Wall Street has seemingly embraced the concept of a Trump presidency. My own forecast of a market decline if Trump were to be elected proved accurate, as did my advice to hold steady through the worse. What I didn’t expect was that the entire sell-off would occur in just one night. At its worst, the Dow was down 5-6% election night before rebounding the next day.
On the economic front, there is much that Trump and I agree on. Better quality jobs and more of them, higher economic growth, better trade deals than we have settled for in the past, and most of all, a government spending program that would fulfill his promise of making America great again. As such, I am encouraged, more than I am discouraged, by our new president. Let’s see what happens.