Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Dave Eiswert, portfolio manager of the T. Rowe Price Global Focused Growth Equity, warns it may be time to take profits from US equities.
What a year 2016 was for investors. An early year bear market has given way to a full-on cyclical bull market that has powered through Brexit, Donald Trump’s US presidential victory, as well as general weakness in economic growth and corporate earnings. At least for now, the market is choosing to look through a crescendo of macro and political noise and change and focus on the potential for cyclical recovery.
While there remain many uncertainties at the macro level, the first 100 days of Trump’s presidency in 2017 will be watched with high intensity by markets. To state the obvious, this creates a set up for ongoing market volatility as well as likely stock and sector rotation. Knowing the stocks you want to buy and being confident enough to buy them during periods of weakness is going to be an ongoing necessity.
The question many are wrestling with is will Trump's presidency be defined by a focus on the populist policies that carried him to victory, or by traditional republican policies that may help to stimulate the US economy. In general, the market has narrowed down its focus on traditional Republican policies, and so far, we have seen much more of Trump the Republican versus Trump the populist. This is a positive, but the key question is whether this reality holds, especially under the pressures that will follow
In the near term, we think it makes sense to hold at least enough dry powder to take advantage of the occasional presidential ‘Tweet Storm’ that may rattle singular stocks or industries. We will certainly be aiming to pick up attractive long-term ideas when appropriate.
Why Did US Equities Bounce Post Election?
So, why the positive reaction to the election result, given the sell-off that was anticipated? Partly, it’s because Republicans spend more than Democrats, at least Democrats that have been prevented from spending for eight years by Congressional deadlock. History and rhetoric would tell us that we should expect policies aimed at growth; growth which will theoretically offset lower taxes and any increase in spending. That has a number of consequences if, indeed, growth rhetoric turns into a growth reality.
Time will tell if this comes to pass, but we can certainly expect lower headline corporate and individual tax rates. This will be important for US companies pay high US tax rates, while foreign cash repatriation is also likely to happen. We would also expect a slowing and rolling back of some aspects of regulation. This may allow some pharmaceutical companies room to maintain or increase prices in the name of innovation and it has already taken some pressure off financial companies.
Given the upward trend that was already in motion, we should expect some further inflation, a modest interest rate increase cycle and a general shift in investor expectations around these factors. Expectations often dictate behaviour and it will be important to monitor this dimension in order to understand shifts in corporate policy, as well as in investor behaviour when expectations meet actual policy in 2017.
We would caution it is important not to forget that there is an element of honeymoon around US politics at present. The best days to be buying stocks were in the first few days after the US election result, and even better, in the period before the result. We would emphasise that, today, there’s a need to think longer-term and potentially trim some of the initial winners as policies become more distinct from the promises of an election campaign that became extreme by anyone’s measure.
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