Opportunities, Risks, and Challenges for Investors Following the Presidential Election

Ivanna Hampton: Donald Trump is heading back to the White House. The Republican defeated Democrat Kamala Harris to win the US presidency for a second time. That’s according to The Associated Press, and the GOP regained control of the Senate while the House remains up in the air.

What could America’s political leadership change mean for investors? Dave Sekera is the Senior US Market Strategist for Morningstar Research Services. Good to see you, Dave.

David Sekera: Good morning, Ivanna. What a morning it’s been.

Hampton: It has been. President-elect Trump will return to D.C. with his party controlling at least one chamber of Congress. How are the markets reacting? Let’s time-stamp this conversation. It’s Nov. 6, almost 10:30.

Sekera: Well, we are definitely seeing the Trump bump early this morning. In fact, even overnight futures were already skyrocketing before the markets opened. After open, we saw a little bit of a back off, some people doing some profit-taking, but then right now it looks like stocks are moving right back up again. So depending on the index that you’re watching, it looks like the markets are up about 2%, give or take a little bit, right now. Up across the board, large cap, small cap, mid-cap, everything is up. Value stocks, growth stocks, but I would highlight that small-cap stocks are actually up the most. And of course that is the one area of the market that we’ve been highlighting for a while now as really being the last area of the market that we thought was truly undervalued. Trading at a big discount from intrinsic valuations.

Taking a look at what else is going on here: I think a lot of it’s really just because of the anticipation that, under his administration, we’ll continue to see the corporate business tax cuts he put in place under his prior administration, they’ll get extended, so those won’t end up rolling off. And in fact, if they get control of the House, then we could see additional tax cuts, whether those are corporate or personal tax cuts, come through as well.

And of course, if he institutes the tariff, a lot of people are looking at, from a GDP point of view, that it could be a negative for the economy. It also could cause some inflationary pressures. But from the stock point of view, for those companies that have pricing power, that actually could end up helping them generate some additional earnings growth. So of course, if they’re able to pass through those costs and increase their revenue, keep their operating margins, keep the same volumes, that actually benefit their earnings, so companies with wide economic moats, those specifically with pricing power actually also doing very well this morning as well. And of course, just the anticipation for potentially looser regulations and easier policy stance from that administration on corporations also a tailwind in today’s marketplace.

Looking at the bond market—bonds are actually, well, specifically long-term bonds are getting crushed this morning. So we’re seeing the yield on the 10-year Treasury now at about 4.45%. Now, that’s been on a negative momentum really since the Fed cut rates by 50 basis points. But again, that’s a big move in one individual day here. And of course if that starts going up too much higher, if we start actually getting above 4.5, start getting towards 5.0, that actually would start to concern me from a market point of view from stocks.

And of course then lastly, just looking at the US dollar, a lot of strengthening in the US dollar today, which actually will be beneficial for consumers. So if we did have tariffs that got put in place, that stronger dollar would actually help offset some of the impact of those tariffs.

Hampton: Well, what are you looking for in the days ahead? What are you anticipating?

Sekera: To some degree, we’re watching to see what happens with the House, whether that goes and stays in Republican hands or goes into Democratic hands. But to some degree, I’d also tell investors, right now, really you need to ignore a lot of this short-term noise. Really focus on the fundamentals, really focus on what those policy changes will be when they get enacted. Of course, just because a politician is stumping on something on the campaign trail doesn’t mean that that is necessarily what’s going to get done. Most likely gets watered down before it actually gets put into place anyways.

So really for now, we’re just sticking with our long-term valuation analysis, looking at where stocks are trading compared to their intrinsic valuations. And when I look at the market today, it is trading, with today’s bump, probably a 3% to 4% premium above fair value. Now, a lot of investors may say, “Eh, 3% to 4% doesn’t sound like that much from a market point of view,” but when I look at our valuations going back to 2010, less than 20% of the time have we seen the market trade at this much of a premium or more. So again, I would say that when I break it down into the different categories, value stocks still look to be a more attractive part of the marketplace, trading pretty close to fair value, whereas growth stocks are still trading at a very large premium. In fact, when I look at growth stocks, rarely have they ever traded at this much of a premium or more. So now might be a good time to look at those growth stocks in your portfolio, look for some of those that are particularly overvalued and overextended, and today might be a good day to lock in some gains on some of those stocks. And then of course, the small-cap space, even with today’s bump, it’s still the most undervalued part of the market in our view.

Hampton: How does today’s bump compare to the bump when President-elect Trump was about to enter the White House for the first time?

Sekera: I think it is much different today than what we saw back then. So today we were looking at stocks already being pretty fully valued, maybe slightly overvalued coming into this morning, whereas back when he was elected the first time, stocks were actually trading at a pretty large discount from where we thought that they should have been valued. I think it’s much easier for the market to run further at that point in time than I think what the market has to move today.

Hampton: And what should investors watch for? Where are the opportunities? Where are the risks or the challenges?

Sekera: Yeah. Again, elections have consequences, but I’d also caution that those consequences may not necessarily always be what you think they’re going to be. And even when they are, I’d note that a lot of times valuations in the market may have already priced that in. So if investors haven’t read it, I highly recommend go look at John Rekenthaler’s articles. He wrote one not that long ago, and he compared what happened under the Trump administration and the Biden administration for clean energy and oil stocks. Now, you would expect under a Trump administration, oil stocks would do better, clean energy would do worse, but it was actually the exact opposite. And in fact, under the Biden administration, those energy stocks or oil stocks did much better and the clean energy stocks did worse. So again, it’s one of those things where it was the valuations of where those stocks were trading ahead of time and over the course of the administration as opposed to necessarily some of the policy changes that were put in place at that point in time.

I’d also take a look at the US Treasuries. I think at 4.5%, they’re starting to look pretty attractive here. Our US economics team still thinks that long-term Treasury rates overall should be on a multiyear decline. We’re looking, I think, for about 3.6% next year, probably closer to 3.0% by 2027. So I think they’re looking attractive here. Although I’d still steer clear of corporate bonds. I don’t think you’re getting paid enough corporate bond spread and really to compensate for the additional risks there.

But overall, I would just say: Don’t let any of these dire headlines that you may see here in the short term dissuade you from your long-term investment objectives. Based on your risk tolerance, I probably wouldn’t be making any changes here today. And when you do make changes, make sure that you’re only making changes when there’s really a change in your underlying fundamentals and only make changes in your portfolio based on an informed analysis.

Hampton: So, think long-term and keep to the game plan.

Sekera: Exactly. And as always.

Hampton: Thank you for your time today, Dave.

Sekera: Of course. Thank you, Ivanna.