Winners and losers under Trump
Posted on: 01/20/2017
Donald Trump was sworn in as U.S. president on Jan. 20, and even with a supportive Senate and Congress, it’s hard to believe he will achieve the hopes of his supporters.
Still, there is much that can be accomplished and many opportunities for improvement. Unfortunately, changes won’t come without controversy surrounding highly-debated topics such as immigration, trade policies, Supreme Court nominations, regulatory reform, climate change policies and budget cuts. The stock market hates uncertainty, and the incoming president will continue to prompt some concern among the markets, especially during the first year of his term. Therefore, I’m expecting a lot of stock market volatility in 2017.
The No. 1 principle to remember when investing in a volatile market environment is diversification. As investors look to reposition themselves in the new landscape, some likely winners and losers can already be assumed. Here are some of the sectors that will do well and those which will suffer as the transfer of power proceeds.
We will see some economic stimulus from success in reducing corporate and personal income taxes, and this will allow the Federal Reserve (Fed) room to raise U.S. interest rates. A rising interest rate environment is positive for financial securities, like banks, but terrible for bonds, particularly those with longer maturities. Investors may want to overweight U.S. financial stocks and underweight bonds in their portfolios.
President Trump has spoken very favorably regarding natural gas, oil and coal. He supports pipelines, infrastructure, regulatory reform and the exporting of energy from the U.S. His policies are likely to improve the outlook for energy companies in the U.S.; therefore, investors should consider overweighting energy equities in their portfolio.
Pro-Gold and Silver
According to Reuters, Italy’s Banca Monte dei Paschi di Siena (Monte Paschi) plans to issue no less than $15 billion of debt next year “to restore liquidity and boost investor confidence.” This kind of “irresponsible” banking policy could easily cause a worldwide currency crisis. This is why I also suggest that our clients hold at least six months of annual expenses in gold and/or silver bullion and keep it outside of a bank safety deposit box where they can easily get at it as insurance against potential currency problems.
President Trump has discussed significant investment in improving U.S. infrastructure. He plans on funding some of this investment in infrastructure by offering companies with a reported $3 trillion offshore a one-time tax amnesty. This would allow the repatriation of these dollars at a 10 percent tax rate. If 66 percent (two -thirds) of that money was repatriated, we would have $200 billion available to improve U.S. infrastructure. Along with financial and energy equities, investors may want to consider overweighting infrastructure equities as well.
Healthcare reform will likely be a mixed bag, and how healthcare companies may benefit from changes in ObamaCare will depend on exactly what changes are made. As an example, hospitals may find demand reduced if changes impact government subsidized health insurance. The healthcare sector will remain volatile until healthcare reform becomes more transparent. Investors may want to underweight the healthcare sector until they have more information.
Avoid Emerging Markets
Despite recent stock market success, international and emerging markets have concerned me for the last four years, and at this point I’d still underweight international and emerging markets for the same reason: their banking systems are in serious trouble. If the banking system wasn’t desperate, why would Italy’s thrice insolvent (in three years) bank Monte Paschi, which after failing to finalize a private equity offering, be negotiating the terms of its nationalization with the Italian government? This “rescue” could cost Italian taxpayers at least $6.6 billion, and likely more.
Amid market volatility, investors should look to fundamentals and understand the larger market conditions when making investment choices. They should certainly diversify their portfolios, own some gold and/or silver bullion and overweight financials, infrastructure and energy equities in their portfolios. Conversely, investors should underweight bonds, health care, international and emerging market equities. Despite the potential uncertainty and market volatility, now is not the time to sit in cash. We believe 2017 will be a positive year for the U.S. stock market.