Since the presidential election was decided in November, the stock market has done little but go up, with the S&P 500, NASDAQ and the Dow Jones Industrial Average hitting record highs. Is this surge in stock market optimism a reaction to President-elect Donald Trump’s business-friendly policies, or are we headed for a fall?
Here to peer into the stock market’s future are: Marc Horner, wealth advisor and founder of Fairhaven Wealth Management; and Susan Schmidt, senior portfolio manager and research analyst for Westwood Holdings Group.
Below, Q&As with Horner and Schmidt.
What are your immediate thoughts on the markets under a Trump administration?
Marc Horner: If they’re able to deliver at all on the agenda of infrastructure spending tax reform and deregulation I think all of those should be positives for the market. There’s old adage in investing that bull markets are born in pessimism, they grow in skepticism, they mature in optimism, and they die in euphoria. I think there’s generally been a transition from skepticism to one of more optimism in the last couple of years to one of more optimism – some of the agenda items that we just talked about might actually have a chance of coming to fruition would be good for the economy – maybe equally, it’s that a decision’s been made, we know who the president is and we can get on with our lives that having to deal with for the last year, hearing about two of the most hated candidates in history, that can’t help but wear on people emotionally.
So think that just that a decision’s been made is as much as a contributing factor as what may come from this administration. It’s been funny that to watch the markets that whenever Trump got a little bit of an edge, that generally was bad for markets, markets didn’t react well to that – but since he won, it’s been basically straight up, so that’s been a funny change of heart to watch.
Susan Schmidt: We’ve seen a lot of exuberance and run up since the election and a surge in the market – all of the things that are being talked about – infrastructure spend, tax reform, repatriation of cash, all of these things are extremely positive in the sound bites, they’re great, but that rarely translates through immediately into the market. So I think that all these things on the surface are positive for the market but it’s all about how they get enacted. The problems in the market is what I think is going to be a change in volatility. We’ve had volatility as it relates to the economic backdrop – whether it’s how the employment numbers are doing, how consumer confidence is trending, what’s going on in Europe or China, so we’ve been ripe for a lot of exogenous shock. Now it’s internal shock because a random tweet can send the healthcare industry into disarray.
Health care is going to be affected no matter what happens. What do you think will happen there?
Horner: Health care is a big sector. Hospitals have been a big benefactor from the ACA – so hospitals could be negatively affected if that gets dismantled in some sort of meaningful way. Deregulation on the other hand might help the pharmaceutical industry. So it could go both ways within the health care sector.
Legislation regarding raising the minimum wage efforts and overtime pay – how do you anticipate that will affect the markets?
Horner: I don’t think any of these issues exist in a vacuum – the solution to the minimum wage issue is less about mandating certain wages and should be a renewed focus on education – the data is overwhelming that the amount of education a person receives in their lifetime is positively correlated to their job prospects, lifetime earnings, the unemployment they experience in their career. I think that also goes in the financial markets – nobody in school is taught in a consistent way about the fundamentals of personal finance – the importance of saving. I think the longer term solution to minimum wage is dedicating to education affordability.
Schmidt: That’s been a topic in the market for the last 12 to 24 months – so talk of an increase in the cost of labor impacts retail, restaurants, the minimum wage workers who are feeling that across the board. We’ve seen several of these businesses move towards increasing their base wage, they’ve increased the overall packages in some cases to the employees. So I don’t think that’s going to be an impact to the market because the market has been hearing CEOs talk about this, and CEOs have done a good job positioning their companies to accommodate those changes.
What sectors of the market do you expect to be in trouble in 2017?
Horner: I’d say it’s the annual prediction of the doom of the bond market – its death has been forecast now for the last eight years so I’m not sure how much weight to put into that. But I would say that as individuals are putting together their own portfolios, bonds just in general, one would be less optimistic – that being said, the bond market term covers a huge variety of bonds – there are some bonds that do quite well in a growing economy even in the face of rising interest rates if in fact that does play out. Because one is going to be high-yield bonds–they tend to do well in times of economic growth and rising rates. In fact, junk bonds as an asset class did better than the S&P 500.
How do you think Trump’s unpredictable public comments will affect markets, particularly foreign markets?
Schmidt: It’s going to be interesting to watch. What we’ve seen so far is there was a bigger reaction when he came out with a Tweet against Boeing on the cost of Air Force One – and then that tempered. There have been subsequent Tweets, about Lockheed Martin, Toyota, and the reaction to the market has dampened with each one.
The foreign market, like the U.S. market, is going to look at this and look at it and say, let’s take a wait-and-see approach. The foreign markets are still going to depend on what happens in their own economy. The market doesn’t like surprises and they really don’t know how to handle this. This is a complete wildcard, because we don’t have any understanding of the direction of policy. We really don’t have any specifics, so when they do come out it’s sometimes a complete surprise. In many ways it’s the Republican platform but in many ways it’s not. Initial reactions are always extreme, and once the market gets used to it, it’s going to settle in, and the market’s going to take a wait-and-see approach and take it in stride. Or at least we certainly hope it does, otherwise there will be volatility, unless they take his Twitter account away.
What’s behind the growth in so-called FANG stocks? Do you think it’ll continue?
Schmidt: Part of it is a lot of tech companies have profits overseas – so when we talk about repatriation, some of the companies that could benefit from that, bringing cash back in the U.S., would be tech companies.
Another side to that coin is that a lot of these tech companies manufacture components overseas – they import into the U.S. to become part of the final product, or they import the final product in its entirety. The same stocks that have been market darlings if you’re a retail investor – they are the advent of a new generation – they’ve been these bellwether stocks that people have wanted to invest in because they’re relatable – everyone knows what Google is now, everyone is looking at Facebook.
FANG is a little different from the rest of the tech world – we’re seeing some differences. Apple is seeing some ups and downs with Apple prices because people aren’t sure what’s going to happen with the production of Apple phones, they’re made in China – how is that going to work?
What do you think is creating the Trump bump?
Schmidt: The surge has really been this relief rally where we had a lot of uncertainty going into the elections. There was mass confusion over who would win, how this would develop, and so now I think there’s a relief on that. And now we’ve seen the market go up, but I think a lot of that is sound bites – “I’m going to cut taxes” – great! Everybody likes that. Businesses certainly like it; it means that they’re more profitable.
So we’ve seen a lot of that translate into optimism about domestic business – consumer confidence, CEO confidence has come up – so all of that has translated into higher stock prices. Again, a lot of it has been valued on an aggressive time frame and we still have Congress to work with and so it could take longer.
Will it last?
Schmidt: Over time, the market tends to go up – it’s had a big rise – anytime you have this sort of big leap you want to take it in stride and not assume it will continue. The market has a way of surprising you, either good or bad, over time. For now, it seems like it’s going to stick. When we look at where you want to invest, you look at the dynamics of Europe, certainly in England, we’re worried about a harsh Brexit rather than a gradual Brexit, and we’re concerned about what’s going on China and what will happen there, there seems to be still a trust in the U.S. economy more so than international economy. So that supports people investing in U.S. stocks.
Certainly anything that comes under direct attack or is caught in controversy in Congress is going to have trouble over the course of the year – not necessarily go down but maybe not appreciate as much as other sectors. We’re starting to see that in health care, there’s just uncertainty around it. When we talk about the import-export taxes, credits that are going to be taking place, it’s not clear how that will be affected, how it will be enacted, who would be affected by that, so there, it’s not so much sector as particular businesses. Certainly, from an overall operating stance, if you’re domestically focused, you still are working with one of the stronger economies of the world whereas if you’re internationally focused we’re still working through some of the issues in Europe and Asia, and even though we’d like to think that’s gone away, that was a huge spotlight for us at this time last year, when the market woke up and thought China was going to disappear and completely fall apart. We went into a big downturn last year into the middle of February because everybody thought the world was coming to an end because of China. We have a way of adopting these stances and taking it to the extreme and that does put pressure on the market.
Even though it’s January and we want to start fresh, nothing’s changed, we still have some of the same macroeconomic issues that we had last year.
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