By Gordon Pape, Editor and Publisher
“Dow’s best week in 5 years,” proclaimed the headline in last Saturday’s Wall Street Journal.
The story went on to say that after the U.S. election investors poured money into industrial stocks and banks on the assumption they would benefit from increased government spending and an easing in the regulatory climate under a Trump administration.
That was all well and good for people who were heavily invested in those sectors. Unfortunately, any income-based portfolio may have gone in the opposite direction.
Income investors usually gravitate to stocks that provide a decent yield, or the funds that invest in those types of securities. The banks are on that list but so is a range of other interest-sensitive securities such as REITs, utilities, telecoms, etc. They didn’t fare well in a week where long-dormant concerns about inflation were suddenly reawakened and the global bond market was savaged.
The S&P/TSX Capped REIT Index was down 2.7% on the week and the Telecom index fell 2.2%. Utilities were the biggest losers, dropping a stomach-churning 5.6%. The chances are that at week’s end, the returns on your personal income portfolio looked more like those numbers than those recorded by the Dow.
So what lies ahead?
More of the same? Probably, at least for a while. Trump’s surprise victory, combined with Republican control of both houses of Congress, has set in motion a series of events that looked somewhat improbable prior to Election Day. They include a ramp-up in government spending on defense and infrastructure, a dismantling of many of the regulations that have been blamed for impeding business, and tax cuts that favour corporations. If the economic forecasts are to be believed, all this will lead to greater growth stimulus within the U.S. but also to higher (maybe much higher) deficits and inflation.
Compounding the problem for interest-sensitive stocks is the U.S. Federal Reserve Board. It has been poised to raise interest rates for some time but there was speculation that if markets crashed following a Trump victory there would be a delay. Given the positive response of investors, a quarter-point rate hike in December is now a near certainty, unless some devastating event happens in the meantime.
A December increase would likely be followed by as many as three more in 2017, especially if inflation starts to pick up. That would be bad news for most interest-sensitive stocks.
However, one area that should benefit is the financials – banks and insurance companies. We saw evidence of that in the days immediately following the election and there should be more profits coming if the Trump scenario unfolds as currently predicted.
Looking at the financials on our Recommended List, Sun Life Financial (TSX, NYSE: SLF) was the biggest beneficiary of the Trump bump, gaining $5.62 in the three days of trading after the election results were confirmed. Power Financial Corporation (TSX: PWF), which owns Great-West Life, was ahead $1.10.
Among the banks, BMO Financial (TSX, NYSE: BMO) was up $1.07 while Canadian Western Bank (TSX: CWB) added $0.68. The only loser was Bank of Nova Scotia (TSX, NYSE: BNS), which fell $1.18. Investors were negative on the bank’s large Latin American exposure (it’s the seventh-largest bank in Mexico) in view of Donald Trump’s repeated threats to slap huge tariffs on imports from that region.
Last week’s rally in financials took stocks like Sun Life and BMO Financial to record highs. But there still could be more gains to come as widening rate spreads improve profitability. It’s not a good idea to buy at the time of a big uptick but be prepared to increase your position in this sector on any pullbacks.
As for the rest of your portfolio, my advice at this stage is not to panic and sell off good quality companies. Remember, when you made your original investment your primary goal was to generate good cash flow at a reasonable risk. If the dividend/distribution of a security is not at risk, this is not a time to dump it. Most interest-sensitive stocks have posted strong gains in the past year so you have a cushion to help you ride out the current correction.
It’s far too soon to know what the long-term implications of a Trump presidency will be. I suspect, based on his campaign rhetoric, that it will not be good but I hope to be surprised. Until the lines become clearer, stick to your plan, collect your dividends, and keep your cool.