Investors should do less, not more, following Trump’s re-election

Data shows identifying undervalued assets has a greater impact on performance than who sits in The White House.

Elections are a dangerous time for investors. There is a strong temptation to overreact to campaign rhetoric and there can be an emotional response to changes of leadership too. The recent US elections have been no exception, with markets booming in response to former President Donald Trump’s re-election.

The S&P 500, Nasdaq and Dow Jones all hit record highs during the week following the election, with the dollar having its best day in two years and a surge in Treasury yields. Part of this outperformance no doubt resulted from investors breathing a sigh of relief at what was perceived to be a tight election being called quickly and with a clear winner. In the days since, investors have piled into so-called ‘Trump trades’, betting on which asset classes are most likely to benefit from the president-elect’s expected policies.

While there may be short-term opportunities to profit from quick market moves, there is also plenty of scope to make the wrong calls. Investors should avoid reacting in the immediate aftermath and instead focus on the long term.

For one thing, our research finds that the party in The White House does not typically have a significant impact on asset prices. Less than 1 per cent of equity returns have been determined by which party is in The White House in the past 200 or so years. On the other hand, 18 per cent of returns have come from the starting price of assets, with returns higher when markets were undervalued. (see chart)

Political predictions are problematic

This does not mean changes in policy between ruling parties are meaningless – these are likely to have a big impact on performance of different sectors and asset classes. Rather, we simply know too little about policy details of the incoming US government and how much power can be wielded by the Republicans’ slim majority in the House of Representatives for this to definitively drive current investment decisions.

Sentiment has already changed on many stocks and sectors, based on the president-elect’s stated policies that include increased supply of oil and gas, looser regulations, less antitrust activity and increased tariffs. Crypto assets have also performed well, as has Tesla, based on expected shift in policy and Elon Musk’s close relationship with the president-elect. The “pops” in stocks mean the most strongly held views about what may happen are already reflected in prices of many stocks, making them very sensitive to whether this transpires. These are not firm foundations upon which to base an investment strategy.

Back to basics

Instead, asset allocators would be better placed to focus on value and which companies are benefiting from pre-election trends. Some assets have long been priced for pessimistic outcomes and remain undervalued. There are opportunities in US smaller companies and UK equities, both of which remain deeply discounted. Big Chinese tech companies are also driving innovation but remain undervalued compared to US counterparts. And to protect their portfolios, allocators should consider adding diversifiers such as inflation-linked and high-quality government bonds which can add value in a range of scenarios.

Presidents are often overtaken by events and unable to translate campaign promises into policies. As such, we would urge investors to look at fundamentals and valuations of individual companies rather than focusing exclusively on specific sectors – which may, or may not, benefit from proposed policy changes under President Trump.

In the coming weeks, it is worth all of us calling to mind the words of legendary investor and Oaktree Capital Management founder Howard Marks: “You can prepare but you can’t predict.” Asset allocators can prepare their portfolios by researching and considering the various possibilities under the new president, but they cannot predict which policies and events his term will bring.

This may not result in significant spikes in portfolio performance over the next six months, but those wanting to meet long-term financial goals should match that with an approach looking at a much broader time horizon – what will happen in the next four years of Trump and beyond. Now’s the time for investors to take a step back before diving in.

Mike Coop, CIO, Morningstar Wealth Emea