Even as he sailed through the Republican primaries and continued to attract large, enthusiastic crowds, bucking conventional wisdom and thumbing his nose at political norms at every stop along the way during his 18-month campaign for president, few predicted that Donald Trump would actually be elected. Sure, his most fervent supporters and other partisans were confident, trumpeting his chances at every turn and all but guaranteeing victory. But such talk is routine during political campaigns, especially at the presidential level, so it was easy to discount those rumblings.
While the media and other political observers have attempted to explain what happened, offering up everything from Trump’s ability to successfully tap into economic anxiety among blue-collar whites to a string of tactical mistakes by Hillary Clinton’s campaign, the fact is that Trump will be the president, and investors need to know what to make of it. Here are some things to keep in mind.
- The ongoing shift from bonds into stocks will continue. Long-term interest rates have jumped since the election, suggesting that investors expect Trump and Republicans in Congress to overhaul the tax code, possibly ushering in a period of growth and boosting per-share earnings for corporations. Moreover, it seems almost certain the Fed will hike rates after wrapping up its next meeting in mid-December. Investors, therefore, should alter (if they haven’t already) their stock and bond holdings to reconfigure traditional 60/40 allocation strategies to achieve greater equity exposure. Moreover, within fixed income consider trimming municipal and U.S. government bonds, as well as mortgage-backed securities. Floating-rate securities, preferred stock and junk bonds are likely to perform better in the coming year. In a stark break from the immediate past, building cash reserves could be preferable to bonds.
- Financials should thrive. Not only will net interest rate margins expand as rates go up, but capital requirements may decline under Trump, who has voiced support for overhauling Dodd-Frank. That means banks of all sizes are poised for a rebound after being buffeted by an uptick in regulatory and compliance costs in the aftermath of the financial crisis. However, we see these developments being particularly beneficial for mid-sized and regional banks, including First Republic Bank, a California-based lender. The SPDR KBW Regional Banking ETF (KRE) has already gained nearly 20% since Election Day. National retail banks will no doubt benefit from fewer regulations and higher interest rates as well, but as highlighted by the latest controversy surrounding Wells Fargo, the core business practices of the big banks are broken. Their trading desks will likely produce more profits, but we continue to see struggles on the retail side due to consumer trust and ethics issues.
- Biotechnology and pharmaceuticals are suddenly alive. Due to a perceived willingness to pursue price-control measures against drug companies, Hillary Clinton was seen as an impediment to biotech and pharma investors. The Trump administration, though, will likely be stocked with rabid free marketers who are very likely to view price caps with suspicion, even in the wake of Mylan sparking a national outcry after it hiked EpiPen prices more than 500%. Though this was one of the worst sectors of the year for much of 2016, it has exploded in the wake of Trump’s victory. This shift will likely continue, meaning biotech and pharma companies have an opportunity to regain ground and return to 2015 levels, portending good things for the iShares NASDAQ Biotechnology Index ETF (IBB). With an aging population, Obamacare possibly winding down and fewer price controls, we expect this sector to outperform in 2017.
- A revival of energy infrastructure spending. On the campaign trail, Trump made it more than clear that he will be a friend to the energy industry, seeking to rework what he sees as an onerous and anti-business regulatory framework put in place by the Obama administration. If he’s successful, production costs will go down, and companies like Magellan Midstream Partners and Energy Transfer Partners could see their fortunes turn.
- Las Vegas resurgence. Another thing Trump has made abundantly clear is that he will look out for his own business interests, irrespective of precedent or what others might think. That, combined with the fact that casino mogul Sheldon Adelson is a major Republican donor, suggests that the incoming administration will be hospitable to Las Vegas, where Trump owns a property. That bodes well for casino operators MGM Resorts International and Las Vegas Sands, which could also benefit from the possible arrival of the NFL and increased consumer spending should the administration aggressively cut taxes, as promised.
Trump has built his business empire through a long line of leveraged buyouts. Clearly, he wants to pursue a similar strategy with the American economy. Over the next few years, therefore, expect to see trillions of dollars in new debt, along with large tax cuts for top earners.
In the short term, that could benefit investors. Longer-term, however, these policies are fraught with risk, perhaps sparking unmanageably high rates, possibly a recession and clouding the future of popular government programs like Social Security and Medicare. Similarly, supporting deeply unpopular institutions like banks, drug companies and energy firms will at some point backfire politically. But this is the reality we face, and you have to position your portfolio to take advantage of it.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory with approximately $480 million in assets under advisement. Clients and employees of Gerber Kawasaki own positions in MGM, LVS, MMP, ETP, IBB, KRE, and FRC.
By Ross Gerber
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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