Like many folks, I watched Donald Trump’s inaugural address last week with mild amusement and trepidation.
In the week since becoming President, he has signed executive orders to roll back Obamacare, withdraw from the Trans-Pacific Partnership and build a wall on the Mexican border. He also plans to ban refugees and restrict immigration and visitors to the United States and investigate voter fraud.
We had 72 days to digest the fact that Trump would assume office and I’m sure some people thought they would wake up from this bad dream before January 20.
The emotional rollercoaster seems to have been far worse than the stock market ride. While many anticipated a lot more volatility in the markets, we have actually seen the S&P 500 Index rise 7% between the election and January 26, with winners and losers in this mix.
Here’s how a few of the major sectors have fared in reaction to Trump’s possible policy changes.
Banks. The financial sector is up significantly: 10.7% in the U.S. and 10.8% in Canada, with bank stocks being the largest beneficiaries. This was partly due to the rise in interest rates and also due to the promises Trump made about relaxing banking regulations.
Health care. At the opposite end, we have seen a fall-off in health care stocks, with the Canadian health care sector down 7.5% and the U.S. health care sector down 1.6%. The Canadian health care sector is dominated by Valeant (which represents approximately 47% of the sector) so it is much more a single stock story. In the U.S., things are much more diversified and the health care industry is adjusting to the possibility of a repeal of the Affordable Care Act, also known as Obamacare.
Autos. While auto stocks have generally gone up, the auto sector has been trading with greater-than-normal volatility. Trump’s possible policy changes, including trade reforms, tax and employment law, are making the auto industry a very uncertain environment right now.
Many of the value style sub-advisors we work with also did very well in this recent period while our growth style strategies forfeited some previous gains. That runs a bit counter to the inflationary growth rationale mentioned in the media, which should favour most companies, and in particular, the consumer sectors.
As an investment industry, we’re all trying to figure out what comes next and what the impact will be. The fact is, no one really knows – not even Trump.
One of our U.S.-based sub-advisors, Fiduciary Management Inc., captured the contradictions best:
Somehow Mr. Trump is going to spend a trillion dollars on infrastructure without increasing the debt load.
Somehow America is going to sell more of its goods overseas even while we bash our trade partners, threaten to erect additional tariffs, and cope with a very strong dollar.
Somehow we are going to roll back the regulatory burden and make government agencies more accountable, even though most presidents have been saying this for generations and the government just gets bigger.
Somehow we are going to reform the tax code, making it fairer for more people and more attractive for risk-takers and business owners while balancing the budget.
Somehow we’re going to fix the health care system, eliminate perverse incentives and make it much more cost-effective without diminishing access.
We are not mocking these goals. We are simply saying that the proverbial devil is in the details. The last two presidents had many of the same goals and reality fell well short.
There is a great deal of uncertainty in the markets at this time as investors speculate about the negative impact of Trump’s policy changes and trade reforms. But given Trump’s “America First” promise, I find it hard to believe that his administration would make any changes that would hurt America’s profitability.
Investing in the Trump era will require a disciplined approach to stock selection. I take comfort in knowing that we have a diversified group of sub-advisors working on our behalf who are navigating through this unpredictable environment.
Some will be right and some will be wrong, but all will be prudent in analyzing and acting in the best way they can. With more volatility in the stock market, I believe MD’s unique style of active management will have an edge as the world trudges through the next four years.
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