The Trump Trade

The time has come for market commentators and analysts to outline what Donald Trump’s reelection means for the market and your portfolio. Some new takes on an old theme, the “Trump Trade,” have started to emerge as the narrative for the second term of Trump’s presidency takes shape:

• “U.S. small caps may be the better Trump trade,” — Barron’s
• “Deregulation in Trump’s second term could benefit sectors such as Energy, Financial Services, Pharmaceuticals, and Cryptocurrency, while creating policy risks for clean energy and electric vehicles,” — Morgan Stanley
• “…a Trump presidency may mean rising protections for the domestic steel industry.” — Reuters

Perhaps you have read articles about the “Trump economy” and the likely winners and losers thereof. Perhaps you have wondered if you should be taking action. As is often the case with market predictions, we’ll look back four years from now and see that while some themes held up, others were far from accurate. In my article last December, Election Predictions, I highlighted how election-related forecasts can take unexpected turns, with market dynamics frequently defying conventional wisdom. There, you’ll find examples of predictions similar to those mentioned above that widely missed the mark. More concisely, some were dead wrong.

Bullish or Bearish

The Bull Case

Trump’s pro-business approach, characterized by deregulation and corporate and individual tax cuts, is expected to stimulate both the market and the broader U.S. economy. The administration’s push to reduce the size of government could potentially curb overall spending, helping to offset the cost of the tax cuts.

The Bear Case

While tax cuts and tariffs may initially boost growth, they could also prove inflationary, potentially overheating the economy. This resurgence in inflation might prompt a slowdown in economic activity, creating headwinds for long-term growth.

Potential Sector Winners

The Energy and Financial sectors are often seen as clear winners of the “Trump Trade.” However, flooding the market with affordable energy could increase supply to the point of depressing energy prices, potentially reducing profitability for energy companies. Similarly, looser regulations for financial institutions could lead to risky practices reminiscent of those that contributed to the Great Financial Crisis of 2008.

Potential Sector Losers

Players in the renewable energy space are deemed potential losers, as Trump is expected to reverse President Biden’s green energy policies. This could create opportunities for global competitors to capitalize on reduced competition from U.S. firms. Questions remain about whether Chinese investments in renewable energy companies could outweigh the decline in U.S. investment.

That said, it’s worth noting the remarkable performance of certain renewable energy companies during Trump’s first term. Enphase Energy (ENPH) and SolarEdge Technologies (SEDG) emerged as standout performers, with gains of approximately 8,500% and 1,270%, respectively. These examples highlight the potential resilience of specific players in the renewable energy sector, even amid challenging policy environments.

Potential Stock Winners and Losers

Defense Contractor RTX Corp saw a 7.5% post-election jump, fueled by Trump’s promise to boost military spending. However, the creation of a new Department of Government Efficiency could curb defense spending, and a restrictive tariff regime may harm foreign sales.

Apparel companies like Steve Madden have been caught in the crosshairs of a potential trade war. More than 70% of Steve Madden’s imports currently come from China and investors, anticipating Trump’s proposed tariffs on Chinese imports, punished the stock immediately following Trump’s win. It looked like a sure loser. Or is it a winner? Days after the election, Steve Madden’s CEO announced the company’s aggressive efforts to reduce its reliance on Chinese imports and the stock promptly regained all of its post-election losses.

Our View

As you might imagine, our advice is to avoid making significant changes to the portfolio in reaction to an election result. Our advice is to own a diversified portfolio with an appropriate allocation, given your need for return and your need for liquidity.

David Booth of Dimensional Fund Advisors famously advised: “Vote with your ballot, not your life savings.” Whether you were elated with the results of the election or overwhelmingly disappointed, your life savings are not the place to let those feelings of exuberance or gloom dictate your long-term strategy. Time and again, there is a stronger case for investors to look past elections and maintain a steady approach to markets—in other words, make a long-term plan and stick to it.

Below are three of the key tenets of our portfolio management philosophy at Bragg Financial. These tenets lead us to invest in stocks for the long term. They also lead us to advise our clients to stick with a long-term investment plan.

1. Stock ownership creates wealth over the long term. A share of stock is much more than a piece of paper; it represents true ownership in a business. In its simplest terms, investing in stock over the long term is an investment in people—a belief that given an opportunity and an incentive, people will make progress. Owning stock allows us to share in this phenomenon. Over time, the returns our clients expect from their portfolios will be generated by our investment in stocks. The fixed income (bond) component of the portfolio exists to create liquidity, cash flow, and a much-needed buffer when stocks are volatile. While fixed income is a necessary portfolio component for most of our clients, we don’t own it for growth; the growth will come from stock ownership.
2. Humility is our greatest strength. We acknowledge that we can’t see the future and we distance ourselves from people who claim to be able to do so. Humility is a critical component of our success, underlying many of the decisions we make as we manage portfolios. It results in our having a healthy respect for the market. The market is efficient; it is hard to beat the market and even harder to time the market. We won’t trade frequently, we won’t load the portfolio with a handful of our “best ideas” and we won’t rotate among sectors or asset classes.
3. Discipline wins, emotion loses. The client’s investment plan is informed by the client’s financial plan. Portfolio holdings reflect the client’s need and desire for return, comfort level with risk and importantly, the need for liquidity. Investing in stocks can be risky. Volatility and significant market declines are expected from time to time and history has demonstrated that many investors make costly, emotional decisions when markets decline. We make a significant effort on the front end to be sure the client owns a portfolio that is appropriate. We then manage the portfolio with great discipline and leave emotion out of the process.

Sometimes we feel a need to DO SOMETHING—take action, change our portfolio—because something has happened. Someone gets elected. One country invades another. A new technology takes center stage. A recession is widely forecasted. The stock market hits an all-time high. The stock market drops 20% on some scary news.

When those things happen, Bragg Financial is there to tell you not to change your long-term investment plan. Once again, we’re advising you to stay the course. But do recall, we did tell you to “do something.” Back when you hired us, we encouraged you to buy stocks. We encouraged you to build a diversified portfolio that is coordinated with your financial plan. We think the plan we’ve helped you develop—and the portfolio we manage for you in support of that plan—gives you the greatest probability of achieving your financial goals. Please let us know if you would like to discuss your plan or your portfolio, or if you simply want a reminder to hold fast in the face of uncertainty. We’re here to help.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.