By Gordon Pape, Editor and Publisher
Late on election night, when a Trump win was looking increasingly possible, Dow futures were down by as much as 750 points. It looked like we were heading for a bloodbath on Wednesday morning. In fact, when the markets opened the Dow drifting down a little but then rallied strongly and finished the day with a big gain of 237 points. It was more of the same on Thursday, with another jump of 218 points. All the other major U.S. indexes followed suit while the TSX also tagged along for the ride.
The big gainers were companies that stand to benefit if the President-elect follows through on his election pledges. They included infrastructure stocks (he has promised a big spending program), defence stocks, healthcare companies (his pledge to repeal Obamacare would boost that sector), and coal companies (he plans to lift restrictions on coal-fired generating plants).
The biggest gains of all were recorded by the banking sector, which has been lagging for some time. Both U.S. and Canadian banks saw their share prices shoot higher as investors bet on significantly higher interest rates in the U.S. (good news for bank spreads) and a rollback of some of the post-2008 regulations that have hampered the banking sector. Life insurance companies also did well, for many of the same reasons.
All our IWB bank picks moved higher in the two days following the vote. On the U.S. side, Wells Fargo (NYSE: WFC) gained $6.09 over the two trading sessions, JPMorgan Chase (NYSE: JPM) was ahead $6.62, gained $1.76, while Citigroup (NYSE: C) jumped $3.70.
Canadian investors were not quite as enthusiastic but we did see Royal Bank (TSX, NYSE: RY) move up by $2.27 and TD (TSX, NYSE: TD) gain $1.36.
Scotiabank (TSX, NYSE: BNS) actually dropped by $0.49, apparently because of concern over the bank’s Latin America exposure.
On the life insurance side, MetLife (NYSE: MET) gained $5.86 in the two days while here in Canada our largest insurer, Manulife (TSX, NYSE: MFC), was ahead by $2.46.
That was all well and good but on Friday a dose of reality set in. Indexes turned soft as investor enthusiasm gave way to the realization that not much is really known about Trump’s policies and that some of his promises could inflict real harm on the economy. These include his threat to tear up NAFTA and his desire to impose huge tariffs on imports from Mexico and China.
Expect this kind of volatility to continue in the months to come. Nobody really knows what to expect from a Trump administration. Every word that is uttered by the President-elect and his top advisors will be parsed for indications on where his policies are going. Given the mercurial nature of the man, we should be prepared for the unexpected.
In the light of these uncertain conditions, what should you be doing with your portfolio? Here are some suggestions.
Stay short-term on bonds
Global bond markets took a huge hit last week over concerns that Trump’s stimulus programs would ramp up U.S. government spending dramatically and push inflation higher. Bonds of all maturities suffered but short-term bonds provide the least risk and a cushion if stock prices fall.
When markets are uneasy, cash is the safest refuge. The more conservative your investing style, the higher your cash position should be. However, with interest rates so low, there’s not much profit to be made there. And if inflation moves higher it will eat away at your buying power. So this is not a long-term strategy, but until the situation clarifies, cash is king.
Don’t overcommit to interest-sensitive stocks
REITs, utilities, and other interest-sensitive sectors were hit last week and we probably haven’t seen the end of it. It appears increasingly likely that the U.S. Federal Reserve Board will raise rates in December and there is now talk of three or four more hikes in 2017. Of course, much will depend on how quickly the new administration moves to implement its policies and what the short-term impact will be. But the Fed has been itching to raise rates for some time now so it would be prudent to expect that to happen. This does not mean to sell all of your interest-sensitive securities.
They will still generate the cash flow that many investors are seeking. But be prepared to see their market value decline unless dividends/distributions are steadily increased.
Be selective in stock selection
Some companies figure to be direct beneficiaries of a Trump administration. One of the most obvious is TransCanada Inc. (TSX, NYSE: TRP), whose application to build the cross-border Keystone XL pipeline was rejected by President Obama after years of dithering. Mr. Trump has promised to give it the go-ahead, although he has suggested the U.S. should get more from the deal than job creation. TRP gained $1.96 in Toronto in Wednesday-Thursday trading before retreating on Friday.
Companies with a strong infrastructure business should also benefit. Mr. Trump has promised a US$1 trillion spending plan to create jobs and grow the economy and, in this context at least, both Canadian and U.S. policies appear to be moving in the same direction. Edmonton-based Stantec (TSX, NYSE: STN), one of our picks, is an example of a company that should benefit. The shares shot up $5.10 (17.6%) in Toronto in the two days after the election.
Defence stocks should also do well under Trump. Most people associate our pick Boeing (NYSE: BA) with passenger jets but the company is also a big supplier to the U.S. military. Its shares were up $5.49 in the two days after the vote. Lockheed Martin (NYSE: LMT) did even better, with a big gain of $18.08.
The precious metal rallied immediately after the election but then sold off as investors became concerned about a rising U.S. dollar, which is negative for gold. The closing price on Friday was US$1,224.30 per ounce, off US$42.10 on the day.
There are two offsetting forces at work here. On the positive side for gold bugs is the uncertainty that the incoming administration will bring. Gold is a safe haven investment that people turn to in times of fear or high volatility, and we can expect a lot of both in the next few years. Countering that is the increased expectation of rising interest rates and the upward pressure that will have on the value of the U.S. dollar.
At this point, it appears the gold sell-off has been overdone. I said before the election that owning some gold would be prudent in the event of a Trump win and I believe that even more now.
Clearly, it’s early days and everyone is still trying to wrap their heads around what the next four years will be like. From all the indications, it will be a period unlike anything we’ve ever experienced. The initial reaction of the markets was to suggest it will be a time of significant growth, rising inflation, and higher interest rates. But it could also be a period in which we lapse into recession or even worse if we end up in a global trade war.
As the British said during the Second World War, it’s a time to keep calm and carry on. Hope for the best but be prepared for the worst.