Will the Trump Rally Cost Us in the Long Run?
Stocks have soared ever since Donald Trump stunned everyone by winning the presidency, but Trump’s victory was far from a landslide mandate. Hillary Clinton won the popular vote by over 2.6M votes. This marks the fifth time a president has won the electoral college but lost the popular vote—and Trump’s popular vote deficit was much larger than the previous four times this election outcome occurred.
But before Democrats claim a moral victory, they would be wise to examine the congressional tally. According to the Wall Street Journal, Republicans won 3M more House votes than Democrats. That means a staggering 5.5M voters picked Clinton and then voted for a Republican congressional candidate—which not only speaks volumes to Trump’s personal unpopularity, but to the rightward drift of white voters.
The ongoing Trump Rally shows that markets approve of PEOTUS’s vow to lower corporate taxes, simplify personal taxes (Trump wants to reduce today’s seven rates to three), and reduce regulations. Energy and financial stocks have gained the most, while tech stocks have lagged. Last year’s big winners, the so-called FANG stocks (Facebook, Amazon, Netflix and Google) have not participated in this celebratory advance.
I anticipate that this trend will continue. Trump lost tech-rich California by 4M votes. Not surprisingly, his ‘kitchen cabinet’ features no Silicon Valley luminaries. From a regulatory standpoint, tech has the most to fear from the new administration. Early in his candidacy, Trump lamented the destruction to local merchants from Amazon (and Trump is also no fan of the Jeff Bezos-owned Washington Post.) Despite the new president’s penchant for late-night tweeting, investors should be wary of owning social media stocks, given their rich valuations and the potential adversarial relationship with Washington.
Wall Street and financial industry stocks have fared better since election day and should continue to do so. Trump wants to end the Fed’s zero interest rate policy and has pledged to purge the Fed of doves like Chairwoman Janet Yellin, whose term expires in early 2018. Higher rates will increase bank profits by increasing the net interest margin from lending. If Dodd-Frank is gutted, smaller banks should grow faster, as well.
But investors need to be careful what they wish for. Less than a decade ago, we got a crash course in the consequences of an unregulated Wall Street. The Consumer Financial Protection Bureau has reduced predatory behavior like payday loans, exorbitant credit card fees, and destructive mortgage terms like negative amortization (thank you Golden West and the Sandlers for making these toxic loans commonplace). Moreover, the recent Department of Labor edict forcing advisors to be fiduciaries first and salespeople second should reduce the excessive fees embedded in mutual funds and other investments. Despite some hopes on Wall Street that the Trump Administration will block implementation of this law in 2017, I suspect it will be enacted as written, and the mutual fund world will either have to adapt or continue to lose assets. I would not own—and might short—the worst positioned players like Waddell & Reed and Franklin Funds.
Finally, while Trump’s proposals might stimulate growth, I am wary about his refusal to address America’s gigantic $19 trillion debt burden. This problem, as outlined in the book This Time is Different by respected economists Rogoff and Reinhart, could keep growth at the sluggish, sub-3 percent rate seen throughout President Obama’s eight years. If that occurs, the S&P may well disappoint the bulls and produce single-, not double-digit gains during Trump’s time in office.
