Donald Trump’s stunning victory blindsided investors and media pundits alike—not to mention part-time finance bloggers like myself. Last week, I all but guaranteed a Clinton victory, and predicted that it would probably lead to slower earnings growth for health care and energy companies, as well as continued anemic economic growth for the country as a whole.
So much for all that.
The biggest loser of the election, besides Clinton, was the polling industry. Either pollsters are incompetent and/or they let their preference for Clinton (or more likely their hatred of Trump) influence their techniques and conclusions. The vote total was also surprising, with fewer votes overall going to Trump or Clinton compared to Obama/McCain in 2008 and Obama/Romney in 2012. Indeed, as other outlets have pointed out, Trump won with fewer votes than Romney’s losing vote total. He gained 42 percent of female voters, vs. 44 percent for Romney four years ago and won 29 percent of Hispanics, vs. 27 percent for Romney. So what happened? African-Americans stayed home in droves. It appears that Clinton attracted several million fewer votes from that reliable, 90+ percent Democratic constituency. Meanwhile, Trump pulled in a fair number of white, non-college educated Midwestern voters who had never voted Republican (or never voted, period). The combination of those two effects helped him sweep the once solidly blue Rust Belt states of Wisconsin, Michigan, Pennsylvania, and Ohio.
Stock investors were clearly just as befuddled by the result as everyone else. Dow futures were down nearly 800 points soon after Trump made his 3 AM EST acceptance speech, but that changed quickly. The Dow opened down only 15 points and rallied steadily, ending Wednesday up 257 points, or 1.4%, for a record closing high. As the day progressed, it seems stock buyers remembered Trump’s vow to lower both corporate and individual tax rates, and his proposal to create a ‘tax holiday’ so US companies could repatriate up to $3 billion in profits held offshore (without paying further taxes to the IRS). With Republicans in control of the Senate and House, these pro-growth proposals might actually happen, and happen quickly, so it’s little wonder the markets rebounded so convincingly.
Health care and financial stocks led the way higher. Health care stocks were the market’s worst performing sector in 2016, as investors feared intensified regulation under a Clinton White House and Democratic Senate. With Republicans controlling all three branches, I suspect health care stocks will continue outperforming through year end. Bank stocks also jumped, as Trump has criticized the Federal Reserve zero interest rate policy. Trump is highly likely to replace dovish Fed chair Janet Yellen, possibly before her term expires in 2018. In that scenario bank profits, and bank stocks, could be surprising winners. I own two Texas bank stocks—Texas Capital Bancshares (TCBI) and Legacy Texas (LTXB)—and would encourage investors to buy high quality regional banks like these into this potentially ongoing rally.
Trump may not be all good for investors, however. He has shown no willingness to propose solutions for our looming entitlement shortfall, and many predict deficits during Trump’s presidency could be worse than the $500 billion to $1 trillion deficits during Obama’s eight-year reign. Someday, possibly while Trump is in office, investors might demand the US pay much higher interest rates on our already massive $19 trillion debt. Stock prices would almost certainly suffer in that event.
Personally, I wish Mr. Trump well. He was not my first (or second or third) choice. But I hope he can make our already great country even greater.