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The Trump Trade – What Just Happened?
Winners and Losers Since Election Day

Matt DeVries
November 2016
by Matt DeVries, CFA®

Ever since it became clear that Donald Trump would be elected president, markets have been moving. A lot. The night of the election, as swing states turned red one-by-one, Asian markets and US stock market futures began to plummet. Futures for the major US indices like the S&P 500 and NASDAQ were down more than 5% in a matter of hours.

This fit the prognostication of many "experts" like the one in this snippet from a New York Times article titled "What Happens to the Markets if Donald Trump Wins?" written by Andrew Ross Sorkin on October 31st:

The conventional wisdom is that, right off the bat, the stock market would fall precipitously. Simon Johnson, the Massachusetts Institute of Technology economist, posited that Mr. Trump's presidency would "likely cause the stock market to crash and plunge the world into recession." He predicted that Mr. Trump's "anti-trade policies would cause a sharp slowdown, much like the British are experiencing" after their vote to exit the European Union.

It is safe to say that many investors went to sleep on election night wondering how much they might lose the next day.

Then, markets proved to be just about as unpredictable as the election results. The morning after the election, when Trump had won enough Electoral College votes to officially become our president elect, stock markets opened near where they had closed the day before and started to move higher. They have kept moving higher up until the time of this writing. Major US stock indices, like the S&P 500, Dow Jones, NASDAQ, and Russell 2000 have all made new all-time highs since the election.

The post-election sentiment has not been as kind to all investments. Below is a chart showing how different asset classes have performed since the election with the oft-cited explanation of the move.

Asset Class Index Post Election Return
(11/9 - 11/30)
Most Common Explanation
Large Cap S&P 500/Dow Jones +2.95%/+4.58% Tax cuts and infrastructure spending will jump start US economic growth
Small Cap Russell 2000 +10.75% Tax cuts and infrastructure spending will jump start the US economy AND changes to trade agreements benefits smaller companies with more domestic operations
International Developed Equities MSCI EAFE -1.41% Backing out the change in the US dollar, the EAFE is actually up 2.70% since the election
Emerging Markets MSCI Emerging Markets -4.39% Emerging markets, with Mexico and China in particular, stand to lose the most from changes to trade agreements
Government Bonds Barclays US Treasury -2.53% Losses from higher interest rates AND lower tax revenue coupled with deficit spending will require additional borrowing sending interest rates higher
US Corporate Bonds Barclays US Corporate -2.47% Losses from higher interest rates and inflation are partially counteracted by improved creditworthiness of issuers
Muni Bonds Barclays Muni -3.92% Losses from higher interest rates AND expectation that lower tax rates reduce the attractiveness of municipal bonds
Global Bonds Barclays Global Aggregate Bond -4.28% Much of this loss is due to a rising US dollar but stronger US economy would boost the global economy as well causing foreign interest rates to begin rising off of all-time lows
US Dollar Dollar Index Spot (DXY) +3.72% Stimulus will widen gap between the stronger US economy relative to other developed nations making the dollar more desirable

So now what? Let's look at the two major asset classes and examine what these recent moves actually mean.

Equities
The significant run up in stocks likely signals that investors believe Trump's policies supported by a Republican Congress will improve US economic growth. So far, markets appear to have priced in the benefits of tax cuts, significant infrastructure spending, and deregulation. There are also possible detractors to economic growth in Trump's platform that could occur like potential anti-free trade policies and growing deficits. Much of Trump's agenda will need to be approved by Congress but there is some precedent to presidents at least changing tax policy in their first 100 days as president such as the $1.6 trillion tax cut signed by President George W. Bush.

Much like the differences among asset class returns, sector returns have not been evenly distributed. Here there are also clear winners and losers.

S&P 500 Sector Post Election Return
(11/9 - 11/30)
Most Common Explanation
Financials +12.30% Top beneficiary from rising rates, a steeper yield curve, and less regulation
Energy +6.70% Partly because of a Trump-promised energy revolution but mostly due to a new OPEC deal
Industrials +6.68% Higher revenues from expected infrastructure spending and increases in defense spending
Materials +5.49% Improved economy and increased demand from infrastructure improvements
Telecommunication Services +4.36% Infrastructure spending and deregulation such as rolling back net neutrality laws
Consumer Discretionary +3.61% Any boost to the economy will increase discretionary spending
Health Care +0.35% Drug companies will benefit but hospitals will lose due to changes to Obamacare
Information Technology -0.46% Wait and see due to potential trade policies
Real Estate -2.38% Higher interest rates make borrowing more expensive and slow the strength in real estate
Consumer Staples -4.42% Sensitive to changes in interest rates
Utilities -5.32% Highly sensitive to changes in interest rates

Bonds
Bond prices have taken a hit since Trump's victory. The thinking is that faster economic growth will be accompanied by inflationary pressures resulting in higher interest rates (lower bond prices) and that tax cuts and infrastructure spending will require additional borrowing by the Federal government. This means the Treasury will have to flood the market with hundreds of billions of dollars' worth of new issuance of bonds. Excess supply of bonds equals lower bond prices and higher yields. The 10-year treasury ended November yielding 2.37% off of July's all-time lows of 1.37%. That comes without any rate changes by the Federal Reserve over that time. Looking ahead for bonds, it is unlikely that rates will continue to rise so quickly. The Federal Reserve has repeated emphasized that rate hikes will come very slowly over the course of several years.

As Benton Bragg points out in the article, "It's Always Tuesday Morning," the market action on election night and since then has been a real surprise and likely a phenomenon that will continue to be dissected and written about for years. Most of the experts were wrong on who would win the election as well as what would happen to markets if Trump won, so they probably aren't a good place to look to figure out what the future holds.

What happens next is anybody's guess (and there is no shortage of guesses). In the past, presidential elections have typically had less of an impact than expected. Either way, we like to focus on the long-term trend. The chart below demonstrates how the economy has expanded over several decades. The market has gone up and down on its way up. Recessions are a normal part of that expansion. The next recession or market decline could start next month or several years from now.


Click to enlarge

Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management.
Data shown in log scale to best illustrate long-term index patterns.
Past performance is not indicative of future returns. Chart is for illustrative purposes only.
U.S. Data are as of November 30, 2016.

November's events have once again stressed the need to have a plan and stick to it. Benjamin Graham said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." The market has definitely voted positively over the past few weeks. Short-term sentiment can change very quickly and unexpectedly, however. Just google "What does Trump mean for investors?" and see how strikingly different the tone is in articles written before and after the election. Owning and sticking to an appropriate allocation gives us a much higher likelihood of achieving our financial goals than trying to predict when that sentiment may change.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.