The following is Part One of a two-part blog post written by True Link Financial CEO Kai Stinchcombe. Kai chose to write this blog after numerous discussions with individuals asking what changes they should make to their current retirement investments given the election of Donald Trump and a shifting American political climate.
Presidents have the power to move financial markets. So, it’s no surprise that the latest election has many Americans wondering whether their own stock portfolio needs adjusting. This is particularly true for those who will soon be (or already are) relying on their investments to support them in retirement. In this two-part article, we’ll cover how the Trump presidency could impact the stock market and what retirees can do to prepare.
Generally, presidential policy can move the market in two ways – through broad initiatives that affect the overall market environment or by advancing policies that affect specific industries. With a Trump presidency, there's also a potential third factor: surprises.
Things like employment, overall economic growth, interest rates, workforce productivity, and so on can impact the performance of the overall market. Frustratingly for most presidents, this is the stuff they’re graded on by the public, but there is actually little they can do to affect change is these areas. The US economy is a big ship that turns only very slowly, and most things presidents can do to affect employment, growth, or interest rates must also be approved by Congress or the Federal Reserve. Essentially, this means that over the long term, wise leadership will lead to higher growth and vice versa, but there are few things a president can do to turbocharge or tank the economy in the short term.
(The main exception to this is starting a war, which the President has a great deal of unilateral authority on. Countries typically borrow a lot of money to fight wars and don't get much tangible financial benefit in return – spending the money on almost anything else would probably generate more economic activity.)
The second way presidents can sway the market is by adopting industry-specific policies. In energy, for example, Trump is expected to be less concerned about environmental protection, relative to Obama, and will likely offer more opportunities for drilling, less regulation of energy production, and less stringent efficiency requirements for cars. All that adds up to a boost for coal, oil, and automotive companies.
In contrast, insurers and hospital systems have come to rely on many provisions of Obamacare – it has increased the number of people with health insurance, which means more customers for the insurers and a higher payment rate for the hospitals. Healthcare companies might do worse than would have been expected had Trump not won the election.
And then third: surprises. The market loves predictability, because it means that a corporation can invest money with high confidence about future payoffs. When the regulatory or economic environment is changing rapidly, companies might be more likely to delay investments (e.g. hiring, building new factories, adopting new technology) to wait and see whether they think it will pay off. For example, if there is uncertainty about automotive emissions regulation, car makers will hold off on designing new engines until they know how efficient they will have to be.
Historically, presidents have been careful to avoid "moving the market" with surprise announcements – intentions and goals are carefully telegraphed over the course of months before new laws are introduced. So far, it seems like a President Trump sees the ability to move markets with a tweet as an advantage rather than a liability. For example, Trump's tweet about the Air Force One contract caused Boeing's stock to drop dramatically, only to recover later in the day when a Boeing executive clarified the situation. We can expect Trump to use this power to great effect – for example, a company that moves jobs overseas might suddenly find their stock jumping around as a result of attracting negative attention from the President.
Let's start with the concept of something being "priced in." When we say that X or Y is "priced in" to the value of the stock, we mean that traders are already aware of X or Y and have reacted to that information. For example, if traders generally believed that a Clinton presidency was very likely and would be good for health insurers, those health insurers stocks would rise on that expectation. Meaning that the probability of her winning, and the probability of her enacting helpful changes to the healthcare system were already "priced in." Traders assumed profits would rise, that the stock would increase in value, and therefore they bought it up, pushing the stock price up to the market's expectation of its future value.
New information is typically "priced in" in a matter of minutes to hours – as it became clear that Trump would win instead of Clinton, the thousands of analysts on Wall Street that follow healthcare companies updated their models and predicted how this would affect various industries. Within a few hours, oil, automotive, weapons, fast food, and private prisons were up, and healthcare, solar, and companies that do a lot of business with Mexico were down.
Why does this matter? Analysts have already made their bets on how Trump's policies will affect the market going forward, so these bets are already "priced in" to the individual stocks and to the market as a whole. If you decided to buy oil stocks, you're not betting that oil will do well under Trump, you're betting that oil will do better than the analysts on Wall Street think it will do. So before you bet on an individual stock or sector, ask yourself, "what do I know about this stock that the analysts don't?" If their full time job is analyzing that particular company and yours isn't, typically you would want to be cautious believing you know better than them whether the stock will go up or down.
All of this means that – if your portfolio is well designed – the best advice is to "stay put" rather than trying to change your allocation to predict the winners and losers in the Trump economy. As with any presidential transition, some stocks will go up and others will go down as people adjust to the new reality, but a well designed portfolio will assume some level of volatility and unpredictability, and will be designed to weather something like an unexpected election result – as well as lots of things that might be much worse. A retirement investment portfolio that is well-designed under a President Obama or a President Bush should be equally well suited to a Trump presidency.
Coming up in Part Two: How to know if you need to make adjustments to your investments and next steps...
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