By Elizabeth O'Brien
Markets are drawing some quick conclusions from Donald Trump's victory in the presidential race. Stocks are soaring and bonds are tumbling, a sign investors expect both faster growth and inflationary pressures arising from Trump's proposed policies.
The market's knee-jerk reactions may be just that. But if you're saving for retirement or drawing income from an IRA or other retirement account, you may want to consider some tweaks to your portfolio. While your asset allocation should depend on your long-term goals, not politics, we may be seeing early indications of some broad market shifts that could impact your portfolio income and total returns.
For now the market is expecting a friendlier federal government when it comes regulatory issues impacting wide swaths of the economy. Sectors like banks, industrials and energy are faring well, along with healthcare. Utilities are down, however.
If you're investing through a broad-market index fund, you'll capture these sector moves. In each case, there's nuance to the story.
Banks, for instance, tend to enjoy laxer regulation under Republicans, and the biggest financial companies may get more of break on new capital rules known as Basel III. But banks also need loan growth to thrive, along with a steeper yield curve that would help their net interest income; neither is a given.
For broad exposure, consider the Financial Select Sector SPDR Fund. It tracks the market, holding big names like JPMorgan Chase, Berkshire Hathaway, Visa, and Bank of America. If the economy keeps expanding, these financial companies should benefit.
Trump has advanced plans to expand oil and gas production, but the story with energy is complicated by geopolitics and international demand, notably China's. Oil and gas prices could get a lift if Trump imposes tougher sanctions against Iran and Venezuela, taking some crude oil off global markets.
Yet if he manages to end the war in Ukraine, it could unleash Russian gas, which could send prices lower. Some analysts think Trump's planned tariffs could also negatively affect oil and natural gas, as they did during the trade wars of the first Trump administration, when U.S. crude exports to China temporarily declined.
The Energy Select Sector SPDR Fund, holding companies like Exxon Mobil, Chevron, and ConocoPhillips has been rising lately, partly because oil prices have firmed up a bit. It may continue to rally as investors bet on some regulatory easing in the U.S., though its long-term performance will hinge on factors largely beyond Washington's control.
Winners and losers aside, it's a good time to build a portfolio of resilient companies that can thrive under different market conditions, Matt McLennan, co-head of the global value team at First Eagle Investments, said at this week's Barron's Live. He likes medical technology companies Becton, Dickinson and Medtronic, which generate good free cash flow and have strong market share and below-average dependence on economic cycles.
The bond market is now trickier. Investors are nervous about Trump's economic proposals, which could rekindle inflation. His policies -- including the proposed extension of the 2017 Tax Cuts and Jobs Act -- may also increase the deficit by $7.75 trillion over a decade, according to estimates by the Committee for a Responsible Federal Budget.
The yield on the 10-year Treasury note soared 17 basis points to 4.46% in trading Wednesday. Other long-term yields also rose. Bond prices and yields move in opposite directions. "The bond market is getting creamed right now," says Mark Grant, chief global strategist at Colliers' Securities.
Bond yields were edging up before the election, both on stronger-than-expected economic growth and expectations for a Trump win. If growth continues, it would necessitate fewer rate cuts from the Federal Reserve, leaving rates a little higher than the markets previously anticipated.
Concerns about the deficit and inflation may now come to the fore. "I don't think rates are coming down much," says Todd Morgan, chairman of Bel Air Investment Advisors in Los Angeles. He plans to hang onto cash a little longer. And he's holding off on rolling shorter-term bonds into longer-term bonds, expecting rates rise to further, especially if Republicans sweep Congress.
Should you sell some bond holdings? It's too early to say. "There's a lot of noise in the market," says Daniela Sabin Hathorn, senior market analyst at Capital.com, a global retail trading platform based in London. "It will take a few days to digest these moves."
In the near term, there's likely to be less pressure at the short-end of the yield curve, which tracks the outlook for rates more closely than longer-term bonds. Short-term yields were basically flat Wednesday.
As the dust settles, consider shifting part of your bond portfolio into short-term bonds or ETFs like iShares 1-3 Year Treasury Bond ETF; it was down 0.2% in early trading Wednesday, reflecting its relative stability. By contrast, the iShares 20+ Year Treasury Bond ETF was down 3.2%.
Other short-term bond funds to consider include SPDR Portfolio Short Term Corporate Bond ETF and SPDR Bloomberg High Yield Bond ETF. The latter is a "junk" fund with more credit risk and higher yields than an investment grade fund. It should hold up well if the economy manages to avoid a recession.
Retirees can also make sure they are investing in non-bond sources of income, such as REITs and dividend-paying stocks.
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 06, 2024 12:18 ET (17:18 GMT)
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