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Election Year Upset: The Trump Effect on Markets

I find that once again, rather than writing on the idea of financial plenty, thankfulness for that abundance and charitable giving, events in Washington, D.C. dictate that I discuss other topics. Last year, it was the impact of a Congressional budget deal on Social Security claiming strategies. This year, it is of course, the election results and the market’s reaction.

This month’s post looks at the following topics:

  • A Trump presidency and its potential impact on:
    • Government spending and inflation
    • The markets
    • Your portfolio
  • Charitable Giving
  • Kulig Financial’s Holiday Schedule

Potential Ramifications of a Trump Presidency

Many of you have asked me what, if anything, to do differently with your portfolios in an election year. Those questions came before the election, and I responded that if you had a portfolio risk level that was right for you, then you did not need to do anything differently. That risk level should take into account poor markets, if they occur, for whatever reason. As you know, I also believe that it is impossible to time markets—i.e., make short term tactical moves, consistently successfully. It is very easy to make investment mistakes, and there have not been many (any?) investors shown to consistently get that right.

What prompted those questions were prognostications by market “experts” who pounded the table for exiting the market just prior to the election. I do not know what they were recommending after the election, or what signposts they would be looking for to re-enter the market.

I am also not sure which candidate they all expected to win. If it was Trump, their forecasts were right for exactly one day, as the market plunged. But then it turned completely around the following day, erasing the previous losses and then some for a total gain of 1200 points for the Dow Jones average.

The bond markets were also volatile. During the stock market decline, US Treasury yields plunged, with the 10-year note falling 17 basis points, then climbing 37 basis points (a basis point is 1/100th of a percentage point).

So what caused these manic-depressive shifts in the market? Initially, the markets were behaving in a typical “risk off” trade, which is typical in times of uncertainty–investors tend to desert stocks and rush toward high quality bonds. But then the markets took another look and decided that Trump’s presidency would be more like Ronald Reagan’s, with buoyant government spending and tighter money. Some think markets were also soothed by Trump’s conciliatory acceptance speech, assuaging concerns about his previously erratic behavior.

Trump has proposed infrastructure spending to jump start the economy, along with constructing the infamous “wall” and other agenda items. With control of both houses of Congress going to the Republicans, the markets decided some of Trump’s proposals may actually happen. The scenario reflected in its sharp swing upward is one of fiscal stimulus with a positive impact on the economy and stock market, rising inflation, and a corresponding increase in bond market yields (depressing bond prices).

There are several problems with this scenario, with one of the biggest being that there is a lack of detail on the proposals. How Congress will act is also unknown. We do not know whether Republicans will rally around a Trump agenda, or hold onto deficit reduction goals which caused so much sparring with a Democratic administration. The Republicans also narrowly outnumber Dems in the house, so it is possible that Democrats may act as a barrier to Trump proposals. There simply is so little we really know at this point.

I think this recent example of mistaken short-term forecasts demonstrates the folly of basing portfolio strategy on that type of outlook. I think it also proves the worth of a diversified portfolio. If you have invested according to strategies designed at Kulig Financial Advisors, you have an appropriate allocation to stocks, and since they are diversified, you have exposure to the groups which have performed well in the recent upswing. Your bond portfolio does not include long term bonds, which were most negatively impacted by the recent tick upward in rates. It also included TIPs (Treasury Inflation Protected bonds), which did relatively well in the Make America Spend scenario recently favored by the markets.

I anticipate another question, which is now that markets are embracing a higher growth, more inflationary scenario, would that merit a change in portfolio strategy? My response is mostly no. We certainly would not recommend buying more stock, unless you are underweight that asset class; you may find you are overweighted after the last upswing in stock prices, and in addition, they have factored in a lot of economic growth in a very short time and are highly valued. Neither would we recommend leaving the bond market; growth outside the US remains low, and there remains slack in the economy, which could mean that we do not experience high inflation. In addition, you will want your bond money to reinvest at higher rates, should they occur. Also, as mentioned earlier, we have not ventured into long-term bonds and generally do not due to their higher interest rate risk.

The sole area where we do not have much portfolio exposure, which we have been reviewing for a while, is in the commodity arena, which could benefit from a Trump inflation scenario. If we do add this asset class to portfolios, it would be a small percentage as a hedge against an inflationary scenario that may not be kind to stocks or bonds. However, we have found the structure of most commodity funds troubling, as they are heavily weighted toward oil, making oil prices the dominant driver of returns to these products. Also, they do not offer income, which clearly does not meet the needs of some clients. We will keep you posted on our thinking as it develops, either in this newsletter, or individually as seems appropriate for your portfolios.

Charitable Giving

Despite the unpredictable world we live in, I am grateful to be in a profession where I may add to the abundance of my clients. In turn, we may share that abundance with others, whatever our level of income or assets. I also know I am grateful for all of my clients. I truly enjoy each and every one of you.

We are also grateful to be building our business year after year, thanks to you. To give back to the community and commemorate all of you, we are donating 10% of Kulig Financial Advisor’s profits to the Foundation for Financial Planning, which is a non-profit devoted solely to pro bono financial planning. For more on this organization, please see and know a part of every dollar you spend here goes to support a worthy cause.

Kulig Financial’s Holiday Schedule

We plan to be closed both the week of Thanksgiving (week of November 21st) and December 19th through January 1st. Then we will be back at it, refreshed and ready to start another year.

A happy Thanksgiving to all!