Is Your Money Safe from Being Trumped?
Sam Subramanian PhD, MBA
Stocks have rallied after Trump won the U. S. presidential elections in November 2016.
Investors have focused on what can go right with Trump's victory. Expectations of cuts in taxes, increases in infrastructure spending, and reduction in regulations are up.
Financial, industrial, and materials stocks have benefited the most since November 8, 2016.
The rise in bond yields has pressured interest rate-sensitive sectors like real estate and utilities. Stocks in the economically resilient consumer staples sector have lost ground.
The post-election rally has been led by sectors that benefit from higher interest rates and increasing economic activity.
Although investors are ignoring what can go wrong after Trump takes office on January 20, there are many risks worth noting.
Interest rates rise sharply
Trump's plan to spur economic growth comes at a time when the Federal Reserve is forecasting the economy to operate, at what it considers, full employment. The Fed is predicting the unemployment rate to drop to 4.5% in 2017 and remain at this level.
After raising the federal-funds rate by 0.25% in December 2016, the Federal Reserve has set expectations for three interest rate hikes in 2017.
Any rise in inflation from Trump's plans to spur growth runs the risk of the Fed upping both the pace and number of interest rate hikes in 2017 and thereby, creating headwinds for both corporate profits and stock valuation.
Strong dollar crimps earnings
U. S. manufacturing and multinational companies have been battling headwinds from a strengthening U. S. dollar since mid-2014.
Corporate profits for the S&P 500 members declined year-over-year for five straight quarters. The profit recession just ended in the third quarter of 2016.
The rise in bond yields since Trump's victory has renewed the momentum in the dollar's rally against foreign currencies. The Bloomberg Dollar Spot Index (BBDXY), which tracks the performance of the U. S. currency versus a basket of 10 leading global currencies, is up 5% since the presidential election.
Further strength in the dollar can curtail the profits of U. S. manufacturers and multinationals.
With the S&P 500 now trading at 17.0-times forward earnings versus a 10-year average of 14.4, valuation is likely to become a concern if earnings growth falters below the 11.4% expected in 2017.
Trump falls short on cutting taxes and boosting spending
The extent of support Trump's tax reduction and infrastructure spending plans would receive in Congress is not known at this point.
Trump can encounter some resistance from Congressional leaders reluctant to widen the budget deficit.
It is quite conceivable Trump's proposals will likely change as they make their way through Congress.
Congress may water down or delay the tax cuts and infrastructure spending boost proposed by Trump and impede corporate profit growth.
Trump follows through on trade protectionism
Some of Trump's election promises themselves can hurt stocks.
Trump has called for more trade protectionism. He has appointed Peter Navarro, an economist who has urged a hard line on trade with China, to head a newly formed White House National Trade Council.
Trump and his advisors have touted levying a 10% tax on imports. Tariffs on goods from countries like China and Mexico would reduce access to low-cost imports and increase inflation.
The worst case scenario from imposing such protectionist measures is a trade war that impacts both corporate profits and stock valuation.
Cracks in the European Union widen
Results of the Brexit referendum in the U. K. and the presidential election in the U. S. show the rise of populist movements on both sides of the Atlantic.
Sustaining this trend, surveys in Netherlands and France show anti-establishment candidates gaining ground ahead of the upcoming elections.
Netherlands goes to polls on March 15 to elect all 150 members of the House of Representatives in its general election. In France, the first round of presidential election is scheduled for April 23 with a run-off on May 7.
The European Union, already weakened by Britain's vote to exit, would be further undermined if anti-establishment candidates win the elections in Netherlands and France.
How to Invest in 2017
Although investors are bullish at this juncture, they are likely in for a surprise in 2017 as markets test their resolve and flexibility.
If actions are taken as promised to successfully transition the economy from secular stagnation to fiscal reflation, companies benefiting from stronger economic growth and rising interest rates can continue to lead the way, rewarding investors following the current trend.
Stock valuation metrics can expand further if abnormal monetary policy measures used to counter the Great Recession can be unwound without shocks to the economy and markets.
On the other hand, the year 2017 can prove to be a not-so-rewarding one for investors if the above-mentioned risks materialize. In such an event, recent leaders like industrials may well give their gains back.
While investors can benefit from some diversification and balance in this milieu, more frequent rebalancing too can be rewarding as volatile periods provide opportunities to add value.
Investors can take this onerous task on themselves.
Alternatively, they can choose AlphaProfit to guide them on combining investments with low-risk and high-return potential to construct diversified portfolios for the Trump presidency and navigating market gyrations with timely rebalancing.
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