John Manley: The Post Election Investment Landscape

by John Manley, Wells Fargo Asset Management

 “Among all forms of mistake, prophecy is the most gratuitous.” —George Eliot

The result of last week’s presidential election was a surprise to many of us. That is to say that it was not anticipated by the vast majority of investors. It reminds me that you must remember that when a “surprise” is widely anticipated, a surprise that is not surprising is not really a surprise.

Having said that, here are a few of my reactions to last Tuesday’s results:

1. The market rallied triple digits on the day before and the day after the election. The first was when the cessation of the FBI inquiry into Secretary Clinton’s email seemed to make it certain that she would win. The latter was when Donald Trump actually did win. I think the market is happy to have the election over so it can go back to looking at fundamentals (which seem to have been improving for some time).
2. After a brief hiccup, I think the market has it right: Trump will be pro-growth. This should be good for stocks and not good for high-quality bonds. He will not have a perfect relationship with Congress, but they should be able to work together. This could be a turning point for stocks vs. bonds. The Federal Reserve (Fed) will have to do less to promote growth if the government does more. This probably means a quicker move to normal short rates but not necessarily a quicker move to true tightening. Industrial America should benefit from this.
3. I don’t believe everything said about trade, but this should bring the investment focus here in the USA. Emerging markets and developed off-shore sectors still are better values, but, until we see how much of Trump’s rhetoric has been literal, that value may increase somewhat.
4. There should be some relaxation of business regulation. The timing of this and its extent are unclear. However, the Street believes this should be a marginal positive for financials and health care. Remember, financials already offer good value and were poised to benefit from gradually rising short-term rates. The health care sector has declined from a 35% P/E multiple premium to a 5% to 10% premium since early 2015, despite better earnings growth and, in my opinion, very good fundamentals.
5. For eight years the market has been hung over from the financial crisis. Investors remain nervous and skeptical and ready to believe in the next panic at the drop of a hat. Like fears of the return of the Great Depression and Great Inflation, the perception of risk lingered long after the actual threat had passed. When investors finally began to put the past behind them (in 1953 for the Depression and 1984 for inflation) the equity market experienced a strong surge higher. Perhaps the Trump election could provide such a trigger today.
6. Finally, there is an investment lesson: “Prophecy is the most gratuitous form of error.” Predictions are hard to get consistently right. Don’t be afraid to react to surprises. Those who realize a situation’s ramifications could do better than those who are amongst the last to do so.

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