One fact remains of presidential elections: there will be changes. For the past 100 years, there have only been 51 years in which the same party had a majority in both branches of Congress and Senate with the Presidency. The Democrats have dominated control in Congress since 1916 holding majorities over the Republicans in the House (56 years vs. 34 years) and the Senate (65 years vs. 35 years). Just over 50% of the time did one party have a majority in both branches and the White House with the Democrats having control 35 years vs. 16 years for the Republicans. For the second time this century the US has another single party majority.
With no waste of action, investors are repositioning their assets in expectation of these changes based on what they heard from elected officials during their campaigns. Evident by the volatile futures market on election night it appeared that investors feared the worst by plunging the Dow Jones Industrial Average futures down -5%. Strangely, by market open, these same investors’ temperament changed from fears to hope, buying back all they sold by market open and proceed to buy more stocks throughout the day. The rally continued with the S&P 500 gaining 3.8% for the week with global equities soared rising over $1.3 Trillion in that same time span.
Investors were hyper-selective on what they bought creating clear winners and losers. Trump’s goals include lowering corporate and individual taxes, increasing infrastructure spending, and lowering tax on repatriate profits held overseas. Trump indicated he will be following House Speaker Paul Ryan (R. Wis) with a flatter tax rate structure dropping the top tax bracket down to 33% vs current 39.6%. Investors bought companies in brokerage and leisure. The risk of losing gun rights diminished and overnight stocks of gun manufacturers plummeted with Smith & Wesson Holding (SWHC) and S&R each dropping 15%. The increase in infrastructure spending prompt analysts to recommend stocks like Jacobs Engineering (JEC) and Martin Marietta (MLM) and Caterpillar (CAT).
The prospect of a lower tax on repatriated profits, estimated at $2 Trillion, currently held overseas by many companies has possible ramifications. The first is reducing tax liabilities for companies that include Apple (APPL), Microsoft (MSFT), Alphabet (GOOGL), Nike (NKE), Procter & Gamble (PG), and Visa (V). The second is the ability for these companies to reinvest these dollars on US soil for expansion and development creating jobs and economic growth.
Brokerage and asset manager companies may benefit should Trump relax, repeal, or delay the Labor Department’s fiduciary rule for retirement accounts due to be implemented next April. Many viewed this rule to limit advisors and brokers the opportunity to assist retirement participants with their investments (both held in the retirement plan and privately) and prompt more allocations to index type funds. Thus, stocks for asset managers soared including Franklin (BEN) up 10% and 7% for BlackRock (BLK).
For several reasons, the biggest potential risks for investors may be in the bond markets. First, the probability of the Federal Reserve raising rates in December has increased. The 10-Year Treasury bond rallied last week closing at 2.12% from a mid-summer low of 1.39%. For years, the Federal Reserve has chastised Congress on anti-friendly business fiscal policies that have stifled economic growth. The prospects of business-friendly legislation may prompt increased economic activity and rising inflation a key barometer the Federal Reserve wants to keep in check. As inflation rises, expect the Federal Reserve to raise the discount interest rate in attempt to keep inflation to a moderate pace. The 35-year bond market rally may be ending and the opportunity (and challenge) for conservative investors to seek income from new asset classes. One suggestion includes Treasury Inflation Protected Bonds (TIPS) that increase in value with inflation. Replacing your longer-term bonds with short duration bonds will reduce your risk to rising interest rates (bonds decline in value as interest rates rise).
WHAT DOES THIS MEAN TO ME?
Last week’s election will impact 1,000’s of industries based on new legislation creating winners and losers that included banking, health care, bio-tech, technology, and private education to name just a few. As investors, it is important to pay close attention to your portfolio during significant changes in the political climate. The institutional managers have extensive research teams, and the results of their forecasts of the changing policy and economic climates will dictate their buying and selling strategies. You don’t need to understand all the potential changes in Washington and the economy. You only need to watch those that are watching Washington and then follow their lead. Last week experience a broad range of re-positioning that may be reversed two weeks from now. However, ultimately trends will develop and be more obvious how you should invest.