Last week Donald Trump concluded his remarkable candidacy for resident of the U.S. with a surprising win. The initial stock market reaction was overwhelmingly negative before turning sharply positive.
Through Friday, the Dow Jones Industrial Average (^DJI) gained some 500 points, while the yield on the 10-year Treasury rose by about 50 basis points. And although the initial reaction by stock market participants has been overwhelmingly positive, investors should be cautious, because the new environment under a Trump administration may not be as different as many think -- at least not for the stock market. Investors would be wise to remind themselves that markets react emotionally at first but always return to a fundamentals-driven environment. Below are some knee-jerk reactions that are likely to be proven false over the next year or so.
Be wary about shorting bonds. The market's initial reaction, which caused the price of Treasuries to go lower and yields to go higher, was based on speculation that President-elect Trump's policies will have inflationary consequences. This speculation might be correct when it comes to his proposals, but the passing and implementation of Trump's policies have yet to be determined. After all, there is a significant divide between Trump and many members of Congress. Bonds most likely will underperform, but shorting them could be costly.
Investors are betting that soon-to-be President Trump will be a windfall for energy companies, particularly large petroleum exploration and production companies such as Exxon Mobil and Chevron. Perhaps, but renewable energy is unlikely to go away. Abandoning this sector could also prove to be costly.
3. Health Care
The initial reaction to Trump's win was that he would follow through on his campaign pledge to overturn the Affordable Care Act, also known as Obamacare. Yet, in the first few days after the election, Trump has already indicated that he is in favor of keeping several components of the law, so the future of ACA is not necessarily assured demise. Large-cap pharmaceutical companies such as Pfizer and Merck are likely winners in many scenarios, as are insurance companies.
4. Banks and Other Financial Institutions
Here, too, the initial reaction may be overdone. Trump is not particularly cozy with Wall Street banks and may opt to wait to roll back major regulations as other policy changes will likely take priority. Moreover, speculation that interest rates will shoot up and that "all" of Trump's policies will equate to a "huge" increase in capital spending could prove premature. We still have to wait and see how many of Trump's campaign pledges become reality.
There is no doubt that traders have correctly judged the impact of Trump's win as overwhelmingly positive for capital markets. However, an excess of exuberance that leads to indiscriminate buying rarely ends well.
My personal approach: Lock in a 15-year fixed-rate mortgage while rates are very low; avoid a significant reallocation of investments until the dust settles; and be prepared to be a lot more tactical in my investment approach going forward.
If I had to place a bet, the next year could be one of the more volatile years in market history.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned, although these stocks are in some of his firm's client portfolios.