How to Invest Under a Trump Presidency

His election adds uncertainty, which Wall Street hates, but could lead to improved economic growth and benefit health care, financial and infrastructure stocks, among others.

Donald Trump’s election as the 45th president of the United States may have shaken the political establishment (and put a few pollsters out of business). What it hasn’t done, so far, is upend the stock market. On November 9, hours after Trump clinched his stunning victory, the Dow Jones industrial average closed 1.4% higher, and Standard & Poor’s 500-stock index jumped 1.1%—a remarkable turnaround from election night, when the stock market appeared poised to tumble more than 4% as Trump’s chances of winning the White House escalated throughout the evening.

Yet it would be premature to say the markets have fully digested the prospect of a President Trump’s economic agenda or its implications across the investment landscape. With more than two months to go until inauguration day, it’s far from clear how many of his campaign promises will translate into policies or succumb in Congress, where many of Trump’s fellow-Republicans may balk at some of his proposals. Trump has no track record as a politician, widening the potential gap between his campaign rhetoric and action. Also unclear is whom he will appoint to his cabinet, how he will deal with the Federal Reserve and how much unilateral authority he’ll seek in areas such as financial regulation, health care reform, immigration and trade policy.

Given how much we don’t know, we would advise investors to follow Kiplinger columnist Jeff Kosnett’s three-day rule: In times of upheaval, it’s a good idea to wait a few days for financial markets to settle before making any major investment moves, especially if you’re investing for the long haul. “Stay focused, keep perspective, and, above all, don’t make drastic changes to your portfolio,” says Roger Aliaga-Díaz, Vanguard’s chief economist for the Americas.

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Overall, investors should realize that the U.S. economy seems to be on sound footing. Unemployment has been falling, corporate profits are inching up, after declining for four straight quarters, and inflation remains subdued. “People need to realize that, despite a lot of gloom out there, the numbers themselves are very good,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.

As he sees it, Trump’s economic agenda may be more bluster than bite. Trump has pledged that he would “rip up” existing trade agreements, renegotiate the North American Free Trade Agreement (NAFTA) and impose a 35% tariff on imports from Mexico and a 45% tariff on imports from China. He has also barked about branding China a currency manipulator. These moves could trigger a trade war. His agenda also includes tax cuts for individuals and businesses, a big increase in stimulus spending and the repeal of the Affordable Care Act, President Obama’s signature health care law.

Though Trump will have unilateral authority on many trade issues, he’ll need Congress to play along if he wants many of his economic and fiscal proposals to pass. Republicans hold a majority in both the U.S. House and Senate. But the party includes fiscal conservatives who may balk at Trump’s more extreme plans. Congress also teems with career politicians who won’t want to repeal Obamacare without a viable alternative in its place to help potentially uninsured constituents. “It will be hard to walk back [the law] and leave people uninsured,” says Kelly. He also thinks that Congress would consider it “reckless” to allow the U.S. to withdraw from NAFTA or start a trade war with China.

More likely is that we’ll see softer versions of these proposals—what Kelly calls “Trump Lite.” For example, Congress may whittle down Trump’s plan for $500 billion in new infrastructure spending to half that amount. Tax cuts may not be nearly as big as Trump proposes, and health care reforms may result in tweaks rather than a wholesale dismantling of Obamacare. “Don’t expect a big shock in terms of policy,” Kelly says.

Not all strategists take such a sober view, though. At T. Rowe Price, the betting is that Trump’s policies could siphon much of the life out of the economy. Trump’s mix of tax cuts and spending increases, combined with a protectionist trade policy, could trigger steeper budget deficits, slower job growth and less international trade—all of which could tip the U.S. into a recession. “The U.S. could end up with an adverse mix of slower growth and marginally higher inflation,” says Quentin Fitzsimmons, a T. Rowe bond fund manager.

A slowdown in immigration could be a drag on the economy, too. Without a steady stream of immigrants entering the workforce, “there’s not enough growth in the rest of the U.S. workforce for the economy to grow very fast,” says Alan Levenson, chief U.S. economist for T. Rowe.

So what’s the upshot of all this for investors? Here’s a rundown of where things stand:

In the bond market, the new thinking seems to be that a Trump presidency could trigger higher inflation and interest rates—both of which would be bad for bond prices. The yield on the benchmark 10-year Treasury note soared by 0.2 percentage point in trading on November 9, to 2.05%. That’s the 10-year bond’s highest yield since last January. The move crushed bond prices, which move in the opposite direction of yields.

Investors also seem to be betting that a Trump victory will translate to higher government spending. Bond holders may also fear that inflation will accelerate at a much faster pace, says Jason Trennert, chairman and CEO of investment firm Strategas Research Partners. Steeper inflation could prompt the Fed to raise interest rates more aggressively than previously anticipated. Treasury bonds would face a lot of pressure if that scenario pans out. Corporate and high-yield “junk” bonds may also slump, although they wouldn’t decline as much.

As for stocks, the overall market should “muddle through” as the new administration gains its footing, says Dan Clifton, head of policy research at Strategas. Stocks typically sell off after the party that has been out of power wins the presidency. They often slump again in the first three months of a new presidential term. Expect markets to be skittish during this time frame, with some potentially big declines. But the long-term trend will depend on whether Trump is more of a protectionist or a president who focuses his attention on cutting taxes and regulation, says Clifton. “Our sense is that the market will force him into the latter category over time,” he says.

We’re also likely to see winners and losers in various industries. Trump’s promise to repeal the Affordable Care Act could end up being “modestly positive” for health care stocks, says Ziad Bakri, manager of the T. Rowe Health Sciences Fund. Insurance companies may be able to sell more policies across state lines, and drug companies may face less government pressure to cut prices, lifting industry profits. Pharmaceutical companies “hit a grand slam” with the election, says Clifton.

Already, the market appears to expecting stronger profits in the industry. The Health Care Select Sector SPDR Fund (XLV, $71.01)—an exchange-traded fund of drug companies and other health care stocks—climbed 3.8% in trading on November 9.

Energy and financial stocks may also be winners. Trump aims to revitalize the coal industry, expand U.S. energy production and wiggle the country out of a global climate-change agreement that was recently negotiated in Paris. These would all be positive developments for the fossil-fuel industry.

Meanwhile, banks and other financial firms could benefit from Trump’s proposal to repeal regulations under the Dodd-Frank act, giving financial firms a freer hand to lift profits from trading and lending activity. Higher interest rates could also benefit banks’ profit margins on mortgages and other types of loans.

The market seems to have decided that these two sectors would fare well under a President Trump. Financials and energy have been the market’s two best performing sectors since September 26, the night of the first presidential debate, says Strategas.

Another potential beneficiary of a President Trump: industrial-equipment and engineering companies. These firms could get a lift from his proposals to plow upwards of $500 billion into new infrastructure spending. Congress may not approve nearly that much. But even a smaller outlay could help companies such as Caterpillar (CAT, $91.59), which makes backhoes and other construction equipment. Shares of Caterpillar surged 8.1% in trading on November 9 (although the firm still faces the potential for weaker sales because of slowing growth in China and a slump in global commodity prices).

Similarly, defense stocks could get a big lift. Trump has promised to increase spending on the military by 15% — a goal his Republican colleagues in Congress likely share. Defense stocks have rallied on those prospects, with companies such as General Dynamics (GD, $163.05), Northrop Grumman (NOC, $243.43) and Raytheon (RTN, $147.13) all traded up more than 5% on November 9.

Technology companies may find themselves on the losing side of the ledger. Granted, many would benefit from Trump’s proposal to let them bring mountains of cash profits held offshore back to the U.S. without paying tax on the earnings. That could infuse their balance sheets, prompting them to make more acquisitions and expand at a faster clip.

But tech firms may also face tighter immigration rules that could limit their ability to hire skilled foreign workers, who help U.S. tech companies stay globally competitive. Many U.S. tech firms also derive a major portion of their sales and profits in foreign markets that may not be as open to U.S. goods and services.

Companies involved in cloud computing, social media and mobile devices still have bright futures. But investors seem to be taking a dim view of the sector. Vanguard Information Technology ETF (VGT, $119.89), an exchange-traded fund that holds a basket of tech stocks (and a member of the Kiplinger ETF 20), traded flat on November 9.

Stocks owned primarily for their dividend yields may also come under pressure. Utilities, real-estate investment trusts and telecommunications-services firms all fall in this category. The stocks look vulnerable because higher interest rates would make bonds and other yield-oriented investments more appealing. Utilities Select Sector SPDR ETF (XLU, $47.40.) slumped 4.6% in trading the day after Election Day. Vanguard REIT Index (VNQ, $79.64) traded 1.2% lower.

Don’t expect renewable-energy companies to fare well either. Cheaper fossil fuels would make solar and wind power less competitive in the marketplace. Utilities may not upgrade to cleaner-burning natural gas or renewable energy if Trump’s deregulatory agenda goes through, too.

Lastly, the biggest losers may be companies that do lots of business with Mexico. Railroad firm Kansas City Southern (KSU, $82.26), which derives about half of its sales from cross-border traffic with Mexico, traded down by 11.2% on November 9. A wall with our southern neighbor, it appears, wouldn’t be good for business.

Daren Fonda
Senior Associate Editor, Kiplinger's Personal Finance
Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.