By David Eiswert, T. Rowe Price
What a year 2016 was for investors. An early year bear market gave way to a full-on cyclical bull market that powered through Brexit, Donald Trump's US presidential victory, as well as general weakness in economic growth and corporate earnings. While there remain many uncertainties at the macro level, the first 100 days of Donald Trump’s presidency will be watched with high intensity by markets. To state the obvious, this creates a set up for ongoing market volatility as well as likely stock and sector rotation. Knowing the stocks you want to buy and being confident enough to buy them during periods of weakness is going to be an ongoing necessity.
The question many are wrestling with is will Trump's presidency be defined by a focus on the populist policies that carried him to victory, or by traditional republican policies that may help to stimulate the US economy. In general, the market has narrowed down its focus on traditional Republican policies, but the key question is whether this reality holds.
In the near term, we think it makes sense to hold at least enough dry powder to take advantage of the occasional presidential 'Tweet Storm' that may rattle singular stocks or industries. We will certainly be aiming to pick up attractive longterm ideas when appropriate. So, why the positive reaction to the election result, given the sell-off that was anticipated? Partly, it is because Republicans spend more than Democrats, at least Democrats that have been prevented from spending for eight years by Congressional deadlock.
We would caution it is important not to forget that there is an element of honeymoon around US politics at present. The best days to be buying stocks were in the first few days after the US election result, and even better, in the period before the result. We would emphasise that, today, there is a need to think longer-term and potentially trim some of the initial winners as policies become more distinct from the promises of an election campaign that became extreme by anyone's measure.