Key Themes Poised to Influence Portfolios Under the New Administration.
For weeks leading up to and then following President Trump’s victory in the presidential election in November 2024, equity markets enjoyed a strong rally. Market commentators coined this the “Trump Trade,” a rally in sectors or companies likely to thrive under Trump policies, as well as general enthusiasm for a new business-friendly administration. However, in recent weeks, the rally has fizzled, and stocks have fallen roughly back to where they were before it began. Just like that, the so-called Trump Trade was proclaimed to be over. Is it actually over?
We take a more nuanced view that the Trump administration is proposing an economic agenda and regulatory actions that may create opportunities for investors over the next few months or years. Regardless of one's political views, the changing landscape underscores the importance of investors adapting to a new environment.
Specifically, we believe there are three themes that are likely to impact portfolios with the new administration:
A New Emphasis on Deregulation
A key focus for the new administration is deregulation, both in terms of cutting existing regulations and foregoing new ones. It is important to note that deregulation efforts could be easier for the new administration to enact without the approval of Congress; much can be accomplished by regulatory agencies that are part of the executive branch or through executive orders.
Removing certain regulations could potentially be a catalyst for economic growth and stronger earnings for companies in a range of industries. These include:
Cryptocurrencies and blockchain. The incoming administration has embraced cryptocurrencies, floating the idea of creating a strategic bitcoin reserve for the U.S. and sending clear signals that it intends to take a light hand towards regulating the emerging digital currencies. The president has appointed a number of experienced crypto hands to key regulatory and policy posts in his administration, and the Republican congress appears to support the stance. In addition to the cryptocurrencies themselves, an additional beneficiary of the pro-crypto stance will potentially be blockchain firms that help drive the crypto technology.
Small and mid-cap companies. Smaller government and less red tape for businesses has historically resulted in a better business environment, which may be good for equity market growth. Small and middle-sized companies are notable beneficiaries of a deregulatory environment as they typically lack the resources to adapt to burdensome regulations. Small and mid-caps (SMID caps) may also benefit by the increase in potential mergers and acquisition activity that is expected to occur as the new administration is expected to maintain the favorable view of such deals as they did 4 years ago. In addition, small and mid-caps are typically less dependent on exports and could be less affected by the potential tariffs President Trump has proposed, especially if the firms are supplied by U.S.-based companies.
Artificial intelligence (AI). AI has boomed in recent years, but some have expressed concern over the need to regulate the new technology. However, it seems unlikely the new administration will take any meaningful steps to regulate AI. The new administration is focused on strengthening the U.S. edge in technology, rooted in a more centralized strategy. The appointment of David Sacks as the new “Crypto and AI Czar” is evidence of just such a strategy. We believe all of these factors suggest a healthy tailwind for the sector in the coming years.
Yields Remain Attractive
Although the Federal Reserve has begun cutting interest rates, yields have generally remained elevated. Going forward, while yields could move lower, we nonetheless expect they will continue to remain higher than in recent years. This may be good news for income-focused investors who should be able to still obtain consistent income streams that are above the rate of inflation. Investors concerned about the potential for volatility may want to consider strategies that incorporate covered calls1 to maintain or enhance those income streams.
Expect Bumps Along the Way
The U.S. economy has remained resilient, but investors should also be on the lookout for spikes in volatility that could arise from unexpected economic data or geopolitical tensions. President Trump has often used tariffs as a negotiating tactic which could also add volatility to companies with significant non-US revenue exposure.
Interest rate volatility also looks set to continue as incoming economic data has presented mixed signals lately. Investors may consider an allocation to precious metals and silver, which have the benefit of having economic uses, and thus may perform well in flourishing economic environments, as well as serving as a “safe haven” in times of volatility. Moreover, natural resource-oriented companies like those in the Energy and Materials sector could also perform well if geopolitical and/or trade tensions persist.
Summing Up
One of the longstanding rules of investing is focus on the long term but be prepared to adjust your portfolio if or when circumstances change, and new opportunities arise. We are likely to be in just such a situation now. A focus on the impact of deregulation, elevated yields, while bolstering the portfolio against bouts of uncertainty and potential tariffs could be a Trump Trade that presents longer-term benefits for the portfolio.
1A covered call refers to a financial transaction in which the investor selling call options owns an equivalent amount of the underlying security.
Covered call risk is the risk that the Fund will forgo, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price of the underlying security decline.
Investments concentrated in specific industries, sectors, markets, or asset classes may underperform or experience greater volatility than the general securities market. Investments in small and mid-cap companies may have limited liquidity and greater price volatility than large-capitalization companies.
Investments in AI, cloud technology, blockchain, or cybersecurity companies are exposed to risks such as small markets, technological obsolescence, and government regulation. These companies, especially smaller ones, are more volatile and susceptible to adverse events in specific regions or industries.