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The Dow Jones Industrial Average rose about 8% between the day Donald Trump was elected and the day of his swearing-in as president of the United States. Is the “Trump Bump” sustainable? Here’s the case for the Trump Bears; check out the Bullish scenario too.
Count Aidan Garrib among the doubters.
“We’re a bit hesitant on the ability of [President-elect Donald] Trump to, one, get legislation passed in the time frame that the market is expecting and, two, the impact of that legislation if and when it is passed,” says the global macro strategist for Pavilion Global Markets in Montreal.
Two sectors of the stock market that have burst out of the gate since Trump’s election on November 8 look especially vulnerable, in Garrib’s opinion: U.S. small-capitalization stocks, which are expected to see upside from higher trade barriers, and industrials that would benefit from Trump’s pledge to spend US$1 trillion on infrastructure. As we’ve seen in Canada, there’s a long lag time between committing to infrastructure and shovels in the ground, and playing the protectionism card always proves tricky. “These stocks are priced for massive fiscal spending,” Garrib says. “They are vulnerable to a pullback.”
By contrast, Garrib sees opportunity in technology stocks that have been left behind in the Trump rally. These companies will continue to drive the U.S. economy whether or not the Trump agenda is successful, he says. “Google doesn’t care about inflation,” he notes. “People are going to be using Facebook whether growth is fast or slow.”
Garrib also favours certain emerging markets, such as the Philippines. This country is now the top provider of business process outsourcing to U.S. companies, and that business will do even better if the U.S. dollar and U.S. wages rise.
Craig Fehr, investment strategist with Edward Jones Canada, does not expect the Trump administration to be wholly unsuccessful in implementing its economic agenda. However American equity markets have for several weeks been pricing in “almost a best-case scenario,” he says. “The market seems to be assuming that [Trump’s] proposals will take the shape they had on the campaign trail and without major disruption.”
Whenever the new administration’s actions fall short of the promises, he says, “You’re going to see short-term pullbacks based on that disappointment.”
The portfolio to adopt if you think Trump will be frustrated is a global one, says Jurrien Timmer, director of global macro for Fidelity Investments. It assumes that U.S. equities have gotten ahead of themselves and the next year or two will see European stocks and emerging markets play catch-up. This strategy is neutral on bonds; Timmer expects bond yields will track the U.S. dollar, so bonds can only rise in value if the greenback gives up some of its gains.
“The fixed-income strategy is more difficult to call,” agrees Garrib. He shares the consensus view that the 30-year bull market in bonds is now spent and recommends buying floating-rate notes issued by corporations that reset their coupon according to market rates every three or six months.
If you take the view that few if any of Trump’s proposals will play out as hoped, Fehr recommends a defensive positioning, with a heavy weighting to bonds and large-capitalization, high-yielding stocks such as telecoms, utilities and consumer staples. He and his colleagues at Edward Jones are hedging their bets, expecting at least some volatility in the likelihood that a few of Trump’s economic initiatives underwhelm investors’ lofty expectations. “Those pullbacks are going to be wonderful buying opportunities,” he predicts.
Others foresee Trump’s tenure to be not so much unsuccessful as tangential to the performance of their clients’ portfolios. As Gluskin Sheff + Associates’ David Rosenberg and Peter Mann put it in a note last week: “the real money will be made based on classic value investing that focuses more on company fundamentals than on Trump-onomics.”
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