Will Markets and Portfolios Emerge Winners or Losers Under the New Administration?

Based on the little substance that emanated from the presidential campaign, it is almost impossible to game the precise market and economic policy implications of a Trump presidency. What there is to guess at suggests possible gains for the financial sector, companies leveraged to infrastructure, and healthcare companies, should there be dramatic reform to the Affordable Care Act.

What does seem relatively clear is that less regulation and more stimulus, either through government spending, tax cuts, or both, are the likely outcomes. Trade barriers are a wildcard for sure, and could roil markets come January. But the world is already in a jumble of conflicting tariff barriers and free trade initiatives, and yet, trade continues to chug along, especially after the dip in 2015 caused by plunging oil and commodity prices.

No one knows what President-elect Trump’s policies will be or how they will be implemented by the new administration. But we can turn to history for guidance. Going back to 1928, new Republican administrations typically post low market returns for the first year (versus Democrats’ average returns of around 22%), as their attempts to rein in the effects of Democrats’ spending tend to put brakes on the market. But since the new president doesn’t fit the mold of the typical Republican president, he may not follow those same Republican policies.

Although short-term decisions are rarely advised, consider a couple of factors over the longer term that might prompt a look at your portfolio. First, taxes could potentially be somewhat higher, especially at higher income levels, through either higher rates or elimination of tax loopholes. Second, new spending programs to help move the economy forward will require funding through taxes, so a portfolio strategy to maximize after-tax return will be increasingly important. Portfolio diversification also will continue to be critical in 2017, as the president-elect figures out how to govern. Stumbles are to be expected, and with an inexperienced president who is learning on the fly, we can expect volatility to remain high. Alternative asset classes that are not highly correlated to the stock market can help reduce volatility when these disruptions occur.

In summary, an unpredictable new administration can temporarily cause increased market volatility. Expect an interest-rate increase of 25 basis points this month. Spending on infrastructure, funded through either government stimulus, higher taxes, or a combination of both, should spur growth, and modest inflation will follow. A diversified portfolio, comprising low-correlated asset classes, should position investors to benefit from the changes ahead.

Brandon Thomas
Chief Investment Officer
Envestnet | PMC

Author’s disclaimer: The opinions expressed herein reflect our judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities, or investment advice or a recommended course of action in any given situation. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. Information obtained from third party resources are believed to be reliable but not guaranteed. This paper may contain ‘forward-looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader

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