Post-Election, Where Can Active Managers Add Alpha?

First, volatility will be tested as Trump builds and rolls out his team and ideas to the markets. Second, active management just found its three-point shot. On either a sector or a geographic basis, and you will see some areas up big time, while others are down big time. This will continue in the future weeks and months as new policies and laws are brought to the table. There will be much alpha to add by active managers if they can read the tea leaves correctly.

If you want some specific insights into Trump’s plans, his Contract with the American Voter might be a good place to start.

Not to overwhelm you, but here are 15 items that to consider on how the election and the new administration may impact of inside your clients’ portfolios:

• While some Fed members said that they could wait on raising rates if Trump became President, if his higher-spending, lower-taxes acceptance speech is any indication, then inflation could accelerate, which in turn could lead to Fed tightening. Of course, the composition of the Fed may be changing in 2017 as Trump has previously said that he would replace Janet Yellen as chair of the Federal Reserve. 
• Bonds and rates reversed hard after the Trump acceptance speech as $1 trillion in promised spending on infrastructure was paired with corporate and personal tax cuts. The bond markets do not like the pairing of higher spending with the only way to funding it being the U.S. Treasury’s dollar-printing machines.
• Coal, oil, and natural gas are all big winners as restrictions will come off and drilling and mining will be unleashed. That’s good news for energy service and equipment companies. Trains, trucks and pipelines will also benefit from the increased movement of fuels.
• The promised infrastructure spending of $1 trillion will benefit engineering, equipment and materials suppliers (think American steel and aggregates).
• Banks and financials look great. Not only will interest rates glide up with inflationary pressures, but Federal regulations will get axed and Senator Elizabeth Warren moves to the back of the room.

• Defense stocks got an increased spending nod in Trump’s speech. But watch how the spending may change if Trump pulls out of NATO, the Philippines and any other country that no longer wants our presence.

• Within the healthcare segment, Obamacare is removed. Hospital stocks will see fewer beds filled and an increase in patients who no longer have insurance. HMOs will need to unwind everything that they put in place to implement Obamacare, but will no longer need to fight the government over all of the unprofitable business that they had on their books. Drugs and biotech get a ‘no more Hillary’ hall pass, but there will still be immense government pressure on prices (take note that Proposition 61 passed in California last night).

• Changes in immigration will not just impact lower-end service employers like restaurants and hotels but it will also hit high-end tech and sciences, which is why the entire Silicon Valley lined up behind Hillary.

• An end to the TPP and NAFTA plus future trade wars could create input cost volatility and end market disruption for U.S. corporations (think auto and tech companies who design in the U.S., but manufacture or get components from outside the country). Also, any retailers that rely on cheap imports will see either much higher prices for those goods or complete unavailability.

• A promise of falling corporate tax rates from 35% to 15%, plus the repatriation potential of offshore cash, will be good for wages, capex and stock prices. A reminder of some of the large offshore cash hoards: AAPL $215B, MSFT $102.6B, GOOGL $73B, CSCO $60.4B, ORCL $52.3B, PFE $39.3B, JNJ $38.4B, AMGN $31.4B, INTC $31.3B, QCOM $30.6B.

• We have a promise to cut the top personal income tax rate from 39.6% to 33%. Maybe also some structural tax changes to simplify the tax code and the size of a 1040 form?

• Will M&A become unleashed? The Department of Justice will be flipped to one more friendly to big mergers, but we might need to consider the increased uncertainty of future cross-border deals.

• Hollywood real estate is under pressure today. A very long list of celebrities who have vowed they’d move out of the U.S if Trump won: Rosie O’Donnell, Bryan Cranston, Jon Stewart, Samuel L. Jackson, Cher, Lena Dunham, Al Sharpton, Oprah, Mylie Cyrus, Whoopi Goldberg.

• Probably a good bet that Washington, D.C. real estate will come under pressure, too, as the size of government shrinks, combined with a significant reduction in the lobbying industry.

• If you are long Amazon, you may want to revisit this comment: “I have respect for Jeff Bezos, but he bought the Washington Post to have political influence,” Trump said in May. “He owns Amazon. He wants political influence so Amazon will benefit from it. That’s not right. And believe me, if I become president, oh, do they have problems. They’re going to have such problems.”

If you are an active investor, you have a lot to think about now. Hopefully this short and incomplete list will give you some things to consider.

This really is a new day for everyone as so few predicted a 100% GOP outcome. We will all be learning on the fly together and the markets will be constantly moving to reward and penalize. It will be uncertain and full of butterflies in the stomach. Just like that first airline trip.