Now that the President-elect has begun to pick some key players in his new administration (he named his Chief of Staff and Chief Strategist over the weekend), we wanted to follow up on our initial comments from last Wednesday on the sea-change that is Donald Trump. After an initial wave of selling in the initial hours of vote tallying, the U.S. stock market rapidly righted itself, and ended the week at or near all-time highs for most of the major indexes. Bond markets did exactly the opposite, with prices initially rising (interest rates falling) and then falling steeply (interest rates rising) once it became clear that a Trump win was imminent.
The simple conclusion from all this is that markets believe that Trump is pro-growth, and that his bite is less severe than his bark with regard to trade. As we said last Wednesday, his preference for lower taxes, reduced regulation and increased infrastructure spending gives investors hope that U.S. GDP growth may break from the doldrums of the past 8 years. This would obviously benefit corporate earnings, as well as being potentially inflationary, which explains the (inverse) moves in stocks and bonds since November 8th. In addition, in the weeks leading up to Election Day, market strategists had lamented future growth impairments arising from a Trump protectionist wave. Trade concerns have since faded into the background somewhat, as Mr. Trump appears to be more focused on health care and domestic infrastructure in his early policy moves. This could be a bit of a “head fake” however, and investors need to keep a close eye on cabinet appointments for protectionist leanings. A Treasury secretary with a history of protectionist comments would be a bad sign for stocks, for example.
Share prices have already rendered a resounding verdict with regard to which segments of the stock market are expected to thrive under a Trump regime. Bank, defense, drug and infrastructure-related names have all rallied strongly over the past week. As we noted above, markets expect higher inflation under Trump. Interest rates should continue to move up, steepening the yield curve and helping bank earnings. Drug stocks are also breathing a major sigh of relief that Hillary Clinton didn’t win and (perhaps more importantly) Proposition 61 failed in California. Recall that Prop 61 was a ballot initiative to restrict prescription drug prices. The relief rally in drug and biotech stocks may be short lived, however, as Mr. Trump has reportedly been in favor of allowing importation of drugs from other nations.
Finally, Mr. Trump has also emphasized rebuilding both the military and U.S. infrastructure. This has aided defense names and companies with business in road or bridge construction, and makers of the equipment to do the same. We’re somewhat skeptical of a massive new wave of defense spending given remaining Democratic opposition in the Senate, but we think a major highway/bridge bill of some sort is pretty much a sure thing. As with many potential Trump policies, separating the “what he does” from the “what he said” will be the trick in the future. We’re just getting started in that process.