In a shocking development – one whose reverberations are being felt all around the globe — Donald J. Trump won the race for the White House overnight.
He will become the 45th president of the United States, having won by narrow margins in toss up states like Florida and North Carolina as well as states like Michigan and Wisconsin that weren’t seen as likely to fall into the Republican camp.
I’ll leave it to the Washington pundits to pick up the pieces, and explain why so many of their predictions proved wrong. My job here is to explain what the election results mean to you as an investor – to explain who wins, who loses, and what it means for interest rates.
Here are some of my initial thoughts on the ramifications, and what sectors, stocks, and asset classes the vote is bullish or bearish for …
==> Bearish for long-term Treasuries and interest-sensitive stocks – That includes Real Estate Investment Trusts (REITs), home builders, and so on. Trump has openly talked about borrowing huge amounts of money to fund tax cuts and infrastructure spending, which means bond issuance could soar in the coming few years.
Long-term Treasuries were already on the ropes … and long-term rates were already rising. The election should put more “oomph” behind that move. That’s bearish for all kinds of “bond proxies,” including REITs that were already vulnerable to a collapse in commercial real estate lending and pricing. The multifamily submarket should get hit particularly hard.
==> Bullish for defense stocks. They are far and away the biggest likely winners, given Trump’s stated desire to strengthen America’s military. Since Republicans also appear to have maintained control of both the Senate and the House, Trump should have an easier time putting his plans into action.
==> Bearish for hospitals and health insurers, bullish for pharmaceuticals/biotechs – Trump and the Republicans in Congress are likely to radically remake and/or scrap Obamacare. That’s bad for hospital operators and probably health insurers, too, because they saw a huge influx of customers under Obamacare.
But Hillary Clinton’s defeat will likely end the verbal bashing of big pharmaceutical and biotech companies. That means they could rally and rally hard from deeply oversold levels.
==> Bearish emerging markets – Trump has said he wants to renegotiate a lot of the trade agreements made over the last several years, and pursue an “America First” strategy when it comes to dealing with foreign leaders. When you throw in rising long-term interest rates, as well as other signs of discontent over international trade (like the Brexit vote in the U.K.), you can easily make a case that the election is a big negative for emerging markets. That includes both EM bonds and stocks.
==> Bullish gold and volatility – Trump is a much more unpredictable, volatile president-elect than a known quantity like Clinton would have been. I believe we’re going to see bigger swings in stocks, bonds, and commodities over time as a result. So chaos/volatility plays like volatility ETFs, gold, mining shares, and the like should prosper in the days, weeks, and months ahead.
==> Bearish auto makers, auto lenders, auto parts makers – Higher interest rates are a problem for auto lenders reliant on cheap money. They’re also a problem for auto makers and parts makers who were counting on the continuation (rather than my predicted collapse) of the auto lending bubble.
Now, layered on top of that, you have Trump’s stated desire to renegotiate NAFTA and/or pressure companies to move more jobs and factories back to America. Regardless of whether you think that’s a good development for American workers or the economy, it’s bad for the profits of auto and auto parts companies.
They love the cheap labor they can find in places like Mexico because it pads their bottom line. Investors are now going to worry about that going away, and have even more reason to dump these lousy stocks than they already did.
==> Bearish the Federal Reserve and mindless “QE trades” – The current Fed is very much ideologically aligned with the Obama administration and new Keynesian thinking. But Trump has already called out Fed Chairman Janet Yellen for creating a “false economy” and “artificial stock market” by keeping rates too low, and working hand-in-glove with the Obama team.
Yellen is supposed to stay on as Chairman through 2024. One of her chief deputies, Fed governor Lael Brainard, is supposed to be on board through 2026. But Brainard was widely believed to be a chief candidate for Treasury Secretary in a Clinton administration, and Yellen and Trump clearly aren’t on the same page. I wouldn’t be surprised if one or both of those Fed officials step down before their terms expire, either on their own or due to behind-the-scenes pressure.
Even if they don’t, I believe the mindless “QE trades” are over and done with. That means long-term bonds, real estate, artwork, collectibles, and other wildly overvalued assets are likely to face significant deflationary pressure. That’s especially true when you consider the turn in the credit cycle that was already underway, and the tighter lending standards it’s bringing about.
So make sure you adjust your investment strategy to account for a Trump administration. Or better yet, join me in my active investing service All Weather Trader I recommend stocks, ETFs, options, and other investments designed to profit from increasingly volatile environments like this, and many have paid off for my subscribers in the past several months.
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.