Discount chains: A man enters the JPMorgan New York headquarters. Shares of the firm, along with Citigroup Inc and Goldman Sachs, soared on Trump’s victory, and an analyst now says a new era of deregulation could boost Wall Street profitability. — Reuters
NEW YORK: For investors looking past the initial risk-on rally in US equities following Donald Trump’s decisive election victory, now comes the hard part.
The Republican president-elect made plenty of campaign promises – steep tariffs, tax cuts, business-friendly deregulation and tighter immigration laws, among them.
For investors who plowed into stocks last week on speculation Trump’s policies will bolster the economy, the challenge is to figure out which sectors will get a lasting boost.
Tariffs, for example, could spark inflation and hurt large multinational firms, while potentially helping domestically oriented small-cap stocks.
However, an immigration crackdown risks lifting labour costs, likely squeezing smaller businesses. Meanwhile, a friendly stance towards traditional energy that lifts production might drive down oil prices, and efforts to reverse President Joe Biden’s policies designed to help the clean energy and electric vehicle industries could have a hard time getting through Congress.
“I expect active investors to start using a scalpel to sift through at industry levels to see which companies and industries might benefit now,” said Eric Clark, a portfolio manager at Accuvest Global Advisors.
“In time we will get more data points on what will actually be implemented and how to play that.”
Clark has already acted on some opportunities. As banks, industrials, energy and big-tech stocks pushed the equities market higher last Wednesday, he sold some tech and financial shares.
He also bought stocks in luxury retail and consumer staples, which were in the red amid the surge.
Small-cap stocks rallied last week, and they appear to be in a sweet spot as traders assess the potential policy backdrop ahead.
These companies, which make most of their revenue at home, stand to benefit from heightened protectionism. A possible corporate tax cut should also help.
Trump has proposed a 10% to 20% across-the-board levy on imports, and as high as 60% on China-made goods.
The prospect that at least some tariffs will come to fruition helped drive the Russell 2000 Index, a benchmark for small-cap stocks, up 8.6% last week. Digital payments company Sezzle Inc, one of the gauge’s top gainers, doubled during that time.
Financial stocks are also seen as being in a strong position, given Trump’s pledge to make changes to regulatory bodies that have pursued tougher banking rules under Biden.
As Wells Fargo & Co bank analyst Mike Mayo sees it, a new era of deregulation could boost Wall Street profitability.
Shares of Citigroup Inc, Goldman Sachs Group Inc and JPMorgan Chase & Co soared on Trump’s victory.
“Equities are eager to price in Trump’s domestic growth policies via small-caps, and hopes for easier regulation” through bets on shares of financial and big-tech shares, said Venu Krishna, a US equity strategist at Barclays.
Industrial and machinery companies, such as Caterpillar Inc, are poised to gain from a focus on domestic production of energy and mining commodities.
Jefferies analyst Stephen Volkmann reiterated Caterpillar as his top pick in the sector, noting in part its limited exposure to China.
He also said that distributors of industrial supplies, companies like Fastenal Co and WW Grainger Inc, have a strong track record of passing on cost increases, such as from higher tariffs.
The prospect of an immigration crackdown is a potential headwind that investors are watching closely. Still, there are some firms that could benefit, like private prison operators such as CoreCivic Inc and GEO Group Inc.
Meanwhile, some on Wall Street are voicing doubts about certain post-election market moves.
Stocks in the traditional energy sector, which includes oil and gas companies, jumped on Trump’s election, given his pro-oil stance.
Yet, industry watchers warn that efforts to loosen regulations to allow for more fossil fuel extraction on public lands risks creating a supply glut that would sink prices.
Retailers, given their generally heavy exposure to China through the supply chain, slumped last week, and they will likely be in investors’ cross-hairs as tariff talk builds.
Discount chains and home furnishings companies may see some of the biggest impact, said Barclays analyst Seth Sigman.
He called out firms including Five Below Inc, Dollar Tree Inc and electronics retailer Best Buy Co.
Yet, to Accuvest portfolio manager Clark, some consumer companies look attractive, because any tariff increases likely wouldn’t be applied equally across the board. — Bloomberg
