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Time To Trump-Proof Your Portfolio?

Friday, November 18, 2016 11:57
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From David Fabian: Everywhere you look now, someone has an opinion about the direction of the markets under a Trump presidency.  There is speculation on everything from the impact of his trade policies to the potential of further deficit spending and legislative changes.

These factors have coalesced to send many sectors of the stock and bond markets into a tizzy as investors grapple for positioning.

The table below illustrates some of the biggest movers in the ETF universe since the Wednesday following the election.  Many of these sectors tend to be favorites among institutional portfolios and large traders that want gross exposure in a hurry.  They are diversified, liquid, and mostly cheap to own.

Ticker Name %Change
QQQ PowerShares QQQ -0.23%
IWM iShares Russell 2000 ETF 8.91%
EEM iShares Emerging Market ETF -7.63%
XLF Financial Select Sector SPDR 9.38%
KRE SPDR Regional Bank ETF 14.46%
IBB iShares NASDAQ Biotech ETF 11.04%
GLD SPDR Gold Shares ETF -4.04%
HYG iShares High Yield Corp Bond ETF -1.33%
TLT iShares 20+ Yr Treasury Bond ETF -5.90%
*Data from (11/09/16 – 11/16/16)

There are some obvious standouts in this list that are worth noting.  The growth engines have shifted from large cap tech (QQQ) to small cap stocks (IWM).  Banks (KRE) and financial stocks (XLF) are viewed as a strong bet if legislative restrictions are loosened and interest rates continue higher (TLT).  Biotech (IBB) got the sigh of relief that Hillary wasn’t going to clamp down.

The most important thing to realize is that all this repositioning has occurred in a very short period.  It doesn’t necessarily mean that these trends will continue indefinitely or even completely reverse course in due time.  Anyone who guarantees this is the new “playbook” for the next four years is optimistically staring into a crystal ball or taking too much crystal meth.

Ultimately, what other people say doesn’t matter.  It’s how you interpret and react to the news that is of greatest importance to your wealth.  Let’s look at some examples of rational and irrational portfolio moves that you may have considered recently:

Examples Of Irrational Portfolio Moves

  • I’m going to sell all my bonds because Jeffrey Gundlach says interest rates are going to 6%.
  • I’m going to buy nothing but banks, health care stocks, and small caps because those are the week-one leaders.
  • I’m going to own gold…because, you know, Trump likes gold. I’ve seen pictures of his house.
  • I’m going all in on infrastructure and construction stocks because Trump likes to build.
  • I’m going to start dabbling in the forex markets because there have been big trading opportunities there.
  • I’m going to sell everything. I’m terrified of an unforeseeable event that could crash the financial markets.

Examples Of Rational Portfolio Moves

  • I think that interest rates are due for a modest rise higher, so I’m going to slightly lower the duration of my bond holdings.
  • I think that value stocks will outperform growth over the next several years. I’m going to incrementally transition from growth to value indexes.
  • I see that international stocks have been punitively discounted, so I’m going to slowly start accumulating more exposure here.
  • I’m going to do absolutely nothing. I was happy with my holdings before the election and I’m still happy with them now.

The initial list is mostly based on speculation and one-sided bets.  Chasing performance or stepping aside from quick drops can initially create a sense of relief.  However, that can also rapidly turn into additional stress if you made drastic asset allocation changes based on knee-jerk reactions that prove to be false.

The second list is mostly based on level-headed and balanced choices.  They are designed with an intermediate to long-term mindset that eschews emotions for the sake of evidence.  There is nothing wrong with taking a slight tack in your navigation if it’s well-planned and executed.

It’s also worth pointing out that many of the trends that received a boost from the Trump win were already set in motion well before this event.  Interest rates were already trending higher.  Financial stocks were already outperforming.  Small caps have been a high momentum play since the February lows.  That picture hasn’t changed; it’s merely been exacerbated by the sharp moves in recent weeks.  There have been plenty of opportunities to capitalize on these trends if you have been paying attention all along.

The bottom line is that you should be careful drinking from the firehose of assumptions in the initial weeks of any change to the political or financial picture.  The smart move is to continue along a steady and balanced path until you receive additional data or price to confirm your views.  That may lead to incremental and logical steps to reduce exposure in some areas or capitalize on new opportunities in others.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was mostly flat in Friday afternoon trading at $188.70 per share. Year-to-date, the only ETF tied to the DJIA has gained 8.43%.


This article is brought to you courtesy of FMD Capital Markets.

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