Financial Insights

What Now? A Look at How Markets and Sectors Reacted to the Trump Victory.

The election shocker from last night is likely to have a broad reaching impact on various sectors, and the market is attempting to forecast the impact from these changes. Here are our thoughts on various sectors and potential policies. What we know:

Stock Market

It looked initially like the market was going to decline very sharply with Dow futures last night down over 800 points at one point, but the Dow Jones Industrials ended the trading session up over 256 points or 1.4%. However, we are seeing a clear delineation among sectors that may benefit and lose from Trump policies, and we address some of these below.

Interest Rates

Interest rates could move higher and the long range of the curve could move much higher. The bond market is cautious about financing lots of growth without having any impact on inflation. This is good for banks, insurance companies, and anyone else that is positioned for rising rates, like some of our BDCs and commercial mortgage REITs. If the infrastructure spending promised by Trump comes to fruition, it will pressure the labor market and interest rates further.

Health Care and the Affordable Care Act(ACA)

The ACA will be under a lot of pressure and could easily be repealed or replaced. This has far reaching consequences for individual stocks that will both benefit and be hurt by these changes. Hospitals and medical service providers that have benefited from higher volumes of insured patients due to ACA were down sharply today. On the other hand, companies that produce drugs, medical equipment and services could benefit in the Trump administration traded higher today.

Utilities: The Bond Proxy

Utilities and other dividend oriented equities, which many investors consider “bond proxies”, traded lower today. This is appropriately driven by the very sharp increase in interest rates on the long end of the curve. Ten-year treasury rates hit 1.71% overnight but have retreated to over 2%. We have talked about the sky-high valuations in utilities at length. The move today lays bare the risk that has been overlooked in these asset classes for some time. We believe these investments may continue to fall as they give back some outperformance experienced in recent history and reprice with any further moves higher in interest rates. We would continue to avoid utilities due to these risks.

Materials and Industrials

Infrastructure spending is a key part of Donald Trump’s campaign and was universally supported by both candidates. This should benefit those industrial and materials firms exposed to an infrastructure wave.

Both candidates were also supportive of defense spending which has declined to roughly 4.5% of US GDP in recent years. Defense spending is likely to see its first increase in years and defense contractors are trading much higher due to this potential inflection point in the defense budget.

Financials

Today, Financials were the best performing sector in the S&P 500 by a wide margin. Financials should largely benefit from several potential changes. Higher interest rates benefit banks, insurance stocks, certain BDCs, and certain REITs. Furthermore, the potential of a greatly reduced regulatory environment could benefit this sector.

Trump may move to repeal the Department of Labor’s fiduciary rule as well as the banking regulations within Dodd-Frank. In addition, the systemically important financial institution (SIFI) designation and associated regulations may be repealed or reduced as well. These are substantial tailwinds for banks and insurance stocks that have been pressured by these policies.

MLPs and Energy

Both the XL Pipeline and Dakota Access Pipeline are likely to get approved; benefiting MLPs. President Trump is likely to be very supportive of the energy, pipeline, and coal industries. While end market demand ultimately drives pricing in the energy space, reduced regulations should benefit most energy companies and the stocks are all higher today.

Consumer Staples

Remarkably this is now a “risk-on” trade and consumer staples were down sharply. Many consumer staples, such as Coca Cola, have very large international businesses, which could be hurt by reduced trade.

Conclusion

The ramifications on a sector by sector basis are substantial and the market is correctly making very large distinguishing selections about how sectors and individual stocks are positioned for the policies to come. This suggests a very rational market rather than the one we saw in the post Brexit environment where everything simply went down and then fully reversed only a week later. Nonetheless, these large changes provide opportunities to find investments that are attractive and we await further clarity on intended policies from the new administration.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

Share:

Contact Us Today!




    I am interested in


      Investment and Wealth Commentary
      Delivered to Your Inbox Weekly