Positioning for the “Trump Trade”
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 12/16/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 12/19/16.
U.S. large cap stocks took a pause last week from their recent rally as the S&P 500 Index was basically unchanged for the week. U.S. mid1 and small2 cap stocks retreated a bit over the 5 day trading session falling 1.2% and 1.7% respectively. On the international front, developed3 markets slipped back 0.6% while emerging4 markets lost 2.4%. Yields continued to rise as evidence by the yield on the U.S. 10 Year Treasury reaching 2.6%, the highest level since 2014.
The “Trump Trade” has been at the center of many investor minds in the six weeks since Election Day during which time U.S. stocks have surged and yields have risen. As we head into the end of the year we thought it would be worthwhile to review areas of the market that may benefit from a Trump administration, backed by a Republican controlled Senate and House of Representatives. Please keep in mind that this is a high level overview and we are happy to dive deeper into our outlook for 2017 upon request. With that said, we have identified four main areas of focus that will likely affect investment returns:
• Infrastructure spending
The full spectrum of U.S. equities – including large, mid and small cap companies could benefit from these initiatives. Companies that operate in the Energy, Financial, and Healthcare sectors could also benefit from fewer and/or revised regulations within their respective industries. All things being equal, an updated corporate tax code should produce higher profits for businesses of all sizes while large cap multi-nationals, given a tax holiday allowing them to repatriate cash, could see their stock prices move higher. Higher earnings would directly benefit the valuations of these firms while bringing home overseas cash could potentially boost stock buyback activity and/or dividend increases for certain U.S. large cap companies. Updated trade agreements, while specifics are unclear at the moment, could create more business activity for domestically oriented businesses. Finally, infrastructure spending would likely boost U.S. Gross Domestic Product (GDP) through job creation and government spending. This could ultimately strengthen consumer confidence and spending, directly benefiting many U.S. businesses.
While optimism is abounding of late on Wall Street, we remind investors that the days of market volatility are not behind us. As a result, we encourage all investors as they head into 2017 to have a comprehensive review performed on their current portfolio. This will help ensure there are no gaps in their portfolio strategies and that they are positioned to both capture the growth that will likely take place in the sectors and market capitalizations identified above and withstand additional bouts of short-term volatility. To have a complimentary portfolio review completed, please do not hesitate to speak with your Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
The following indexes were used to represent asset class returns: 1Mid cap stocks- Russell Mid cap Index. 2Small Cap stocks – Russell 2000 Index. 3Developed markets – MSCI EAFE Index. 4Emerging Markets – MSCI EM Index.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.