[Editor's Note: We are rerunning some of our best stories of the year.]
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Mark Eshman, co-founder and CIO of ClearRock, an SEC-registered investment advisor with offices in San Francisco and Sun Valley, Idaho.
On the evening of Nov. 8, as it became crystal clear that Hillary Clinton, and not billionaire real estate developer and reality TV star Donald Trump, had virtually no electoral path left to the White House, the Dow Jones futures sold off more than 800 points.
In the next three trading days, something unexpected happened: Copper prices surged 6%, the 10-year yield jumped from 1.85% to 2.15% and the stock market gained 1.2%. All of this happened in the absence of a substantive policy speech by the incoming president, without a flurry of great corporate earnings, and not a peep from the Fed.
Based on the platform Trump campaigned on (and not much else), markets are betting on lower corporate and personal taxes, deficit spending to rebuild the nation’s infrastructure and stimulate job growth, and a more isolationist foreign policy to appease the working class voters who delivered his stunning victory. With a Republican-controlled Congress, the current thinking is that the new president can and will achieve much in a short period of time.
Certain Themes Seem Clear
Even if one assumes that a highly functioning White House, Senate and House can draft and pass into law much of Trump’s agenda over the coming year or two, this cornucopia of legislation is a very tall order.
Yet whatever Washington accomplishes in response to Trump’s ambition, it’s likely to be pro-growth, to increase the budget deficit and consequently generate higher inflation.
What does this portend for the next few months and years for the stock market, the bond market and your asset allocation? What ETFs should you own to optimize your portfolio around a Trump agenda?
Before answering these questions, it’s important to point out that economic cycles are historically somewhat predictable, in that we move from growth to slow down to credit contraction to a recession, and back again. What isn’t always as predictable is the length of each stage of the cycle.