Prior to the election, the economy was looking late cycle. Margins for US companies had peaked, the labor market was at what most consider full capacity, and the global economy – while doing okay in 2016 – was likely at the tail end of the benefits it got from supportive monetary policy and large stimulus in China. The results of the US election have given markets hope these forces will be arrested through a cocktail of deregulation, tax cuts, and repeal of the Affordable Care Act, and markets have responded accordingly, sending stocks much higher and most bonds much lower.
So far, the market seems to be ignoring the more concerning aspects of Trump’s agenda (trade and immigration), or downplaying implementation risks. It also seems to be betting that Trump’s policy will be sufficiently strong and swift to outweigh the late cycle forces – which usually have long lag times – already in motion. Based on current valuations, that is a risky bet. Given these (and other) uncertainties, this is a good time to make sure your portfolio is structured to achieve your individual goals and objectives while considering your tax situation and risk tolerance. Choices could include rebalancing to your baseline allocation ranges, including fixed income assets that exhibit equity-like characteristics but with less downside (High Yield bonds and Bank Loans), safer bonds (short and medium term Investment Grade Corporate Bonds and Municipals) that have taken a substantial beating on the back of the election results and adding absolute return/hedged strategies. Rebalancing likely wouldn’t leave much on the table in the “good Trump” blue-sky scenario, and could perform significantly better if that does not materialize.