Donald Trump stunned many investors around the world when he beat Hillary Clinton to win the U.S. presidential election.
Markets initially tumbled in overnight trading, with the S&P 500 Index down as much as 5%. Many long-term dividend investors, me included, went to sleep excited for some incremental buying opportunities in the morning.
However, we woke up disappointed. The market had made a complete U-turn and was roughly flat with its previous close within just minutes of trading.
The S&P 500 ended up closing higher by roughly 1% on Wednesday and gained more ground Thursday, but there has been meaningful dispersion between sectors.
[drizzle]Over the last two days, the best-performing sector beat the S&P 00 by 6.8%, while the worst-performing sector trailed the market by 7.3%. Those are some massive moves!
Some dividend stocks performed extremely well, while others were clobbered. In this article, I will examine the biggest winners and losers and analyze Donald Trump’s potential impact on dividend stocks as we think about how to position our portfolios for the next four years.
Does a New President Really Matter for Stocks?
Before reviewing the stock market’s response to Trump’s victory, it’s worth mentioning that Republicans and Democrats have not been conclusively better or worse for the stock market.
Here’s an excerpt from a Kiplinger article:
“Conventional wisdom might suggest that Republicans, who are supposedly more business-friendly than the Democrats, would be more beneficial for your stock holdings. In fact, looking back to 1900, Democrats have been slightly better for stocks, with the Dow up an average of nearly 9% annually when the Democrats are in control, compared with nearly 6% per year during Republican administrations. But normal variations in annual stock market returns dwarf that difference, says Russ Koesterich, chief investment strategist at BlackRock. He concludes that a focus on which party wins the White House is unwarranted—at least from an investing standpoint.”
For whatever it is worth, Warren Buffett said he remains “100% optimistic” about America in a recent CNN interview. Unsurprisingly, he thinks any stock market predictions being made about Trump’s presidency are silly – the market will be higher in 10, 20, and 30 years regardless of who is in the office. Warren Buffett’s investment advice is excellent, and I agree with him here.
There are so many other factors that impact markets in unpredictable and more powerful ways than who our country’s leader is. From wars to natural disasters and financial shocks, numerous developments can change the course of the economy and stock market with little to no warning – and there is little that the president can often do about it.
The next four years will be marked by rapid technological developments, the continued rise of the baby boomer generation, and many more factors that are not even knowable today. A new president can certainly tilt the long-term direction our country heads in, but it is sort of like trying to turn a car with failed power steering – turning the wheel in a new direction is very difficult, or even impossible in some cases.
With that said, some companies can certainly thrive or struggle to survive depending on specific policies that are passed. Look at the widespread impact ObamaCare has had on the healthcare value chain, for example.
The market’s rather violent response this week certainly indicated that some investors see clear winners and losers under Trump – regardless of where the overall market heads the next four years.
The Best and Worst Stocks After Donald Trump’s Victory
American entrepreneur, author, and motivational speaker Jim Rohn once said, “You cannot change your destination overnight, but you can change your direction.”
I found these words to be quite fitting when pondering the impact a new president can have on our country and seeing the market’s reaction in recent days.
Looking at Trump’s policies, it’s immediately clear that Trump’s presidency intends to mark a stark change from the eight years we have had under President Obama.
From plans to repeal ObamaCare, renegotiate NAFTA, and build a wall to slashing corporate tax rates, reducing regulations, and investing heavily in infrastructure, there is a lot to digest.
All of these policies are designed with the hopes of fueling job growth and accelerating GDP growth. I agree with many of his policies around taxes and regulation, which have potential to structurally improve the economy (in theory). The market’s vote has been strongly positive, and I sure hope it is right.
As seen in the chart below, financials, industrials, and health care all outperformed the market by more than 3% from November 9th through November 10th.
Less onerous regulations would be a very positive development for banks and financial services firms, which have been under attack by stringent policies such as the Dodd-Frank Act, which has been called the most far reaching Wall Street reform in history. If the economy’s growth picks up, higher interest rates would also help many lenders.
Industrial stocks are likely benefiting from Trump’s commitment to negotiating better trade deals, which could help protect domestic manufacturers. His plans to invest over $500 billion in U.S. infrastructure could also be a boon for industrial companies that have struggled to achieve real growth in recent years.
Healthcare is benefiting from the potential for looser regulation as well, including the potential repeal of ObamaCare. Drug prices have come under a lot of regulatory pressure over the last year, too, but the worst might be over. Who knows. I am not a healthcare expert, but it will be really interesting to see how this space evolves post-ObamaCare. I plan to avoid most of the sector because of all the moving parts that are just too complicated for me to comfortably understand.
Not every sector has been a winner. As seen above, the technology sector trailed the market by 3%. The driver behind the technology sector’s underperformance is harder to pinpoint.
From what I have read, it is tied to two main factors. First, many tech companies have moved their operations and support overseas. Second, Trump’s anti-immigration stance could threaten the number of H-1B visas that are available, reducing the number of skilled workers available for tech giants.
The three worst performing sectors in the market were REITs, consumer staples, and utilities, which trailed the S&P 500 by 4.5%, 5.3%, and 7.3%, respectively.
These areas of the market are sensitive to changes in interest rates over short periods of time and are viewed more as defensive safe havens. As the market began pricing in better economic growth and, in turn, higher interest rates, money flowed out of these sectors into riskier, economy-sensitive sectors. This doesn’t mean these are bad companies or long-term investments. Far from it.
These sectors have just benefited from the low growth, low inflation, and low rate environment observed in recent years. As I have been pointing out in our monthly newsletter, they have traded at P/E multiples 15-20% above their 10-year average multiples and were more sensitive to a correction. For that reason, I have been avoiding putting new capital