On November 8, 2016, Donald J. Trump was elected president of the United States. It was the political upset of our times. The question on almost everyone’s mind is, “Now what?” What will Trump’s presidency mean for the United States? The pundits will be weighing in, but do we really know what awaits our country over the next 4 years? For the next few months, there will be more questions than answers.
Today, I would like to take the opportunity to interpret the main themes of Trump’s campaign and attempt to provide insight as to how those themes may play out over the next few years. I know there is both fear and optimism for Trump and the policies he intends to pursue. To those who are fearful, I would like to bring you back to another troubled time in our country’s history, the Great Depression.” Franklin D. Roosevelt, during his first inaugural speech, uttered the following phrase…a phrase that serves as a perpetual reminder to us that things are never as good or as bad as we think they are…”The only thing we have to fear is fear itself.”(If you would like read or hear the whole speech, please follow this link. http://historymatters.gmu.edu/d/5057). For example, since election day and as of November 16, the Dow Jones is up +2.9%, the S&P 500 is up +1.75%, and the NASDAQ is up +1.95%. All three indexes sit at or near all-time highs. So far, the markets seem to like what a Trump presidency could bring to the economy and markets. As the stock market indices rally, treasury yields have pushed up. For example, the 10 Year Treasury yield climbed to 2.29% from 1.80% just a few short weeks ago. As a result, bond prices have fallen. What could all of this mean?
Obviously, not enough time has gone by to really know what the impact of Trump’s presidency will mean for America. His policies will be met with optimism and disdain depending on what side of the political aisle one tends to walk. Still, if the early reaction of the markets is any indication, the U.S. may find the long-awaited stimulus it has longed for regarding the economy, markets, interest rates, etc. It will take time to really understand how policy shifts will impact the U.S.; but, in my previous article, we found some hints as to what we could expect. If you didn’t read that article, you can reference it here.
Given the direction policy will go once Trump officially takes office, the investment community will be analyzing countless pieces of information in an effort to determine what opportunities and threats investors will face over the next 4 years. Before I attempt to provide some thoughts about this, I need to add a quick disclaimer reminding investors about the importance of diversification, asset allocation and understanding your own risk tolerance, goals, and objectives before taking action on any of the following ideas. As we all know, investing involves risk, including the loss of principal. The following ideas will not be appropriate for all investors. I encourage you to consult with one of our financial professionals to help you determine if any of these ideas are appropriate for you. We can be reached at 303-694-1600.
Following are several ideas you may want to consider as we enter into the next 4 years:
1: Investing in infrastructure: An area of focus for Trump’s administration is to invest one trillion dollars over 10 years into infrastructure to update roads, bridges, airports, etc. As a result, the industrial sector of the S&P 500 would be a reasonable place to consider for a portfolio. If you would like a diversified approach, look for ETFs (exchange traded funds), unit investment trusts, or mutual funds which invest in the sector.
2: Energy: Energy may be key player again in 2017. We saw energy rise from its $25 lows in 2016 and the trend may likely continue. Master limited partnerships and midstream investments may give investors opportunities for attractive income and appreciation. However, much needs to be settled globally regarding supply and demand before we will see energy commodity prices climb to the levels we saw in 2014. Still, one could argue there is still quite a bit of upside potential as the sector continues to recover from lows reached early in 2016.
3: Defense: Trump has promised a renewed government commitment to defense. With an increase in new equipment contracts, development, benefits, etc., for our military, investing in defense looks like a potentially smart play.
4: Technology: For our economy to really get growing again, it’s hard to imagine it happening without technology playing a significant role. It is reasonable to expect significant investments from the government and corporate America into technology infrastructure to support what will drive growth in the future. Technology plays a vital role and fuels economic growth by building efficiencies while lowering the costs associated with productivity. More productivity, at lower cost, and with more efficient processes is a good recipe to increase revenues and profitability.
5: Floating Rate and Lending Investments: With an increasing likelihood of interest rates going up, investments that benefit from a rising interest rate environment will likely attract investors. Structures focused on lending, floating rate (which benefits from rising interest rate environments) can be found in the form of floating rate and credit mutual funds, ETFs, UITs, and business development companies (BDCs), just to name a few options. With the Federal Reserve likely raising interest rates, albeit slowly and cautiously, much of Trump’s policies could pose inflationary pressure on credit instruments which could force interest rates up at a faster rate than previously anticipated.
6: Lower exposure to Treasury and Investment Grade Corporate Bond Funds: If we witness interest rates going up, be cautious about treasuries and investment grade corporate bond funds. It may make more sense to own individual bonds versus bond funds. When it comes to bonds, I want to remind investors about the inverse relationship between interest rates and bond prices. Rising interest rates (yields) drive bond prices down. Falling interest rates push bond prices up. Since the election, interest rate have risen about ½ of 1 percent. This is a significant move in a short period time. As a result, bond prices have fallen which means investors have lost principal. Add in the likelihood the Fed will begin raising interest rates, bond investors will want to be aware how these actions could affect their bond principal.
7: Banking and Financial Companies: Banking and other financial companies could see a resurgence as well; especially if we see a repeal or softening of the regulations imposed by Dodd-Frank and a suspension of any new pending regulations earmarked for the financial sector. Higher interest rates may be beneficial as well as helping banks and insurance companies to increase sales and revenues.
8: Healthcare. Healthcare could see mixed opportunities and threats. This arena has many players and specific selection of where to invest may be important. Repeal or replacement of the Affordable Care Act (Obamacare) could have mixed results. If replaced, the new program could benefit investments in the sector; if costs can be lowered, more people become insured, and the insured use their services. This could help hospitals, insurers, and health care practitioners be more profitable because there are more users. Threats to the system would be fewer people may be insured, government subsidies that have helped hospitals and pharmaceuticals may end, and charges for services and insurance could go up. Trump has a described a plan which improves costs and availability for the public, but anything new has a risk. There are several ways to invest in healthcare using sector mutual funds, ETFs, and UITs. You can also find real estate investment trusts which invest specifically in healthcare-oriented real estate.
9: Municipal Bonds. Municipal bonds have been popular and have shown strong relative performance over the past few years, but will it continue? Given low interest rates, strong credits in the municipal bond arena, and higher taxes, investors have found a good haven in municipal bonds. Additional benefits include tax-exempt interest (federal and possibly state), low risk of default, plenty of bond options to choose from for diversification, and principal appreciation over the last few years have made increased the popularity of municipal bonds over the last few years. However, we have to keep in mind Trump’s goals to lower taxes and remove certain deductions and exemptions for income taxes may make the tax-free elements of municipal bonds less attractive. Also, keep in mind the impact a rising interest rate environment could have on municipal bonds.
10: International Investing. It may not be the time to increase your European holding with the BREXIT issue overshadowing the European Union. Focusing on Asia, Pacific Rim, and emerging markets may be rewarding. You will want to keep aware of new trade policy which could negatively impact imports and exports to and from these countries.
11: Manufacturing. One of the key areas of focus for Trump is bringing jobs back to and giving incentives for companies to stay in the United States. Lowering corporate taxes and renegotiating trade deals is a key component to this goal. If successful, manufacturing could benefit, which would include the auto industry, textiles, technology, steel, etc.
12: Metals and Mining. This may include precious metals, but new trade deals could really help metal manufacturing. The steel industry would likely be a significant benefactor, but I would expect a resurgence in all of the major metals: iron ore, copper, platinum, aluminum, etc.
Hopefully, these themes help you consider new investment options for your portfolio over the next 2-4 years. Things can change quickly, but a good first step would be to determine what, if any, exposure you have to any of these ideas in your current portfolio. These ideas may not be appropriate for all investors. If you would like to discuss your portfolio or explore how these strategies may benefit your portfolio, please call one of our advisors at 303-694-1600. Schedule your Discovery Session today.