How should I position my portfolio now that we know that Donald Trump will be our next President?
I am a little confused on how I should position my portfolio after the election. I am of the opinion that many of President-Elect Trump’s policies will be detrimental to the economy and the stock market, but the stock market continues to outperform. Should I become more conservative in my allocation or more aggressive?
To be perfectly candid, you should have had your investment plans ready ahead of the election for either outcome, so you could quickly and easily make adjustments. An easy way to do this is through Exchange Traded Funds (ETFs) to broad exposure within a sector. Both candidates wanted big infrastructure bailout, so materials and companies that do base metals and materials are great areas for exposure. The SPDR Materials ETF, ticker XLB, and the SPDR Metals and Mining, ticker XME, are solid candidates. Don't be fooled by the "metals and mining" name, look under the hood at the stocks within the ETF.
Transportation companies broke out a few months ago as both candidates were talking about big infrastructure plans. Who is going to move all those construction materials? Transports. The iShares Transportation ETF, IYT, is a perfect way to get broad exposure in those companies. Also, banking is currently timely and very interesting due to rising rates, which makes banks more profitable. Also, Trump has vowed to ease up on regulation. The Regional Bank ETF is KRE and KBE represents the large banks. Both have shown a lot of strength. Lastly, it is likely you will see some changes in healthcare and biotech, but that is less certain.
In full disclosure, we invested in ITY a couple of months ago well before the election and that may be slightly extended now. You may want to wait for a pullback (if we get one). We purchased the materials ETF right after the election, and the metals and mining before the election. We just added the banking ETFs early this week - half a position in each - so that it accounts for one total sector position (10%). This way, we don't have to be to smart and try to outguess whether large or regional will do better.
These sector ETFs represent around 40% along with a semiconductor ETF, the best technology space at the moment, and are what we feel will be the strongest areas. Then the remainder of our portfolio is in indexed or low volatility dividend ETFs for broad exposure coupled with a few great, large cap stocks.
We did have a larger cash position going into election night, between 20% - 25%, depending upon the client just in case the "Trumpix" turned into another "Brexit" or worse. But we quickly deployed the cash the morning after the election in layers over a few days.
This is for research and to be thought provoking, not individual investment advice. You need to make sure these ideas are suitable for you and your situation. And please take this with the constructive criticism for which it was meant. I was trying to provide insight as to how a manager looks forward, creates, and makes adjustments to and within a portfolio. I have been surprised as often as not by what I think should be happening. I have found "I think" and "in my opinion" are dangerous words in money management. I want to look at the money flows and closely follow where the institutional money is going into, and more importantly, out of so I can add or subtract allocations accordingly. This will be for around half of the portfolio in sector rotation. The other half will be in broader indexed and dividend paying ETFs.
I hope this helps to stimulate your thought processes. Best of Luck.
Mr. Trump's plans are unclear and it will certainly be a while before they become known and Congress acts on them. Yes, the stock market has risen, but that rise is not being accompanied by a proportionate increase in underlying profits. That means valuations are being stretched. For more than the past year, the market has moved only slightly higher while in a broad trading range. That's not surprising since corporate profits have been relatively flat as well. When prices move up without profits doing likewise, the risk of being in stocks increases. If the recent rally peters out, that would be a good sign, especially if stocks start moving sidewise while the expected business recovery gets under way. If, on the other hand, the rise continues, it would be reasonable to take a more conservative stance.
You should also be aware that there is a distinct seasonal pattern to market movements. About two-thirds of annual gains are generally registered in the fourth quarter of the year and the first quarter of the following year. That's usually the pattern, but there's no guarantee.
With that said, I suggest you err on the side of conservatism. There are too many imponderables at this point to increase your risk exposure.
History indicates that you should position your portfolio based upon your specific circumstances and risk tolerance. Your portfolio should not be based upon who is in the White House.
While the election will undoubtedly mold the direction of our nation for years to come, if history is any guide, election results have had a relatively minimal impact on longer-term U.S. or global equity returns. Vanguard research going back to 1853 shows that stock market returns are virtually identical, no matter which party runs the White House. What matters more: Growth, earnings, interest rates, inflation, and Federal Reserve policy. Now this is not to say that markets will not experience some short-term volatility as a result of the election with certain sectors that have been prominent topics for both campaigns (health care, financials, and energy) to bear the majority of it. However, this is just one more reason why investors should focus on more meaningful factors than the polls when it comes to their portfolios - such as diversification and having the proper asset allocations for their specific circumstances.
John Correia, CFA
Madison Asset Advisors, LLC
There is nothing wrong with going against the flow, but I question the assumption that the Trump policies are bad for the economy and the stock market. That seems to have been the conventional wisdom prior to the election but the actual market reaction has been the exact opposite.
Global growth and inflation expectations are also tracking the ascent of Trump. The net share of fund managers expecting a stronger economy nearly doubled from last month’s reading, while those surveyed are the most bullish on the prospect of a pick-up in inflation since June 2004.
Investors are now also more optimistic about profit growth than they have been in 15 months.
Whether this new-found optimism is justified is something that only time will tell. In the meantime, the US market is reacting well to Trump’s plans for tax cuts and infrastructure spending. Spending on roads, bridges, and other parts of the infrastructure has been part of Trump’s platform since he entered the race for President. It’s the tax reform that could be the key to a new economic stimulus.
According to CNBC American, corporations are holding $2.5 trillion dollars in cash overseas. That’s equal to 14% of the US gross domestic product. If companies bring that back to the US, it would be taxed at the current corporate tax rate of 35%. The US has the highest corporate tax rate in the world. The promise of lower corporate tax rates – Trump has spoken of 15% – could spur the repatriation of that cash to the US, giving a big boost to a slow growth US economy.
At this point, your guess is as good as mine. The conversation I have been having with my clients is that it is way too early to tell which way things will go. Trump has already flip flopped on numerous issues and that will likely continue. For the time being. I have been suggesting that clients focus on their long term goals and understand that no matter who is the President, the market will go through natural cycles. If you are investing for retirement years from now, then focus on that and buckle up for what will likely be a volatile ride (up and down).
If you are investing for a short term goal, then you probably shouldn't have a ton of equities in your portfolio because the market can do some large swings in short time periods, no matter who our King...er President is. Keep in mind we have been on a bull run for a good part of 8 years and it is natural for the market to reset itself periodically. Some interesting research I came upon recently talked about what happens to the markets when a Republican beats an incumbent Democrat:
When Republicans Beat Incumbent Democrats
Since 1900, the Republicans have ousted the Democrats five other times (1920, 1952, 1968, 1980 and 2000). The post-election year performances were mostly negative: +12% (1921), -4% (1953), -15% (1969), -10% (1981) and -7% (2001). However, every subsequent year (i.e. the mid-term year) except 2003 was positive, with gains of +22% (1922), +44% (1954), +5% (1970) and +20% (1982). The lone loser was 2002, when the DIIA fell -17%. The mid-term year strength also tends to continue the following year (i.e. the pre-election year) as well: 1923 (-3%), 1955 (+21%), 1971 (+6%), 1983 (+20%) and 2003 (+25%).
Take this with a grain of salt - history doesn't always repeat itself and this is an area we have never touched on before.
Tom Cymer CFP
President- Opulen Financial Group LLC