How Will Trump 2.0 Affect Your Portfolio

As we navigate the evolving political landscape, I wanted to share some insights on how a Trump presidency could impact various financial markets, including U.S. and foreign stocks, bonds, Bitcoin, and the U.S. dollar.

Since the election results last week, there has been a strong rally in US stocks, especially Small-cap stocks. The markets have concluded that a Republican sweep of the Presidency, and House of Representatives and the Senate will be bullish for stocks. 

At least in the short term.

Meanwhile the rates on long-term bonds climbed even while the Federal Reserve cut interest rates again. Over the past several weeks, they’ve cut the short-term rates by 0.75% but long-term rates actually went up 0.75% during this time frame.

The bond market thinks a Republican government will be unable to lower the national debt and is worried about the government’s balance sheet.

The debt has been increasing at a much faster rate than prior decades, and since Covid, has exceeded the GDP. This is not a good trend.

As our national debt rises so does our interest cost on this debt, which continues to consume a larger portion of our government revenues (i.e. taxes).

Without a reduction in government spending or an increase in taxes (or maybe both), the bond market doesn’t think we can bring our debt back to more prudent levels. Which is why long-term rates are rising – the market wants to get paid more for the risk of holding long-term debt.

It’s highly unlikely the Republicans will raise taxes. Let’s see if they will be able to reduce spending. The bond market is skeptical.

Trump’s pet campaign promises of new tariffs on foreign goods and the reduction/deportation of illegal immigrants are both inflationary. 

Increasing the cost of imported goods is unlikely to make goods cheaper. America’s famously porous border has provided cheap labor for both the agriculture and construction industries. 

Despite the post-Covid spike in prices, our food and housing prices are still cheaper than most other developed countries and Asian countries when compared to their citizens’ income levels.

The rise in long-term rates has negatively affected mortgage rates and the cost of borrowing for many companies. 

Hopefully Trump can figure out how to make housing affordable again.

Over the long-term, this may lead to lower corporate profits and lower consumer spending levels.

Will his campaign promise of lower corporate tax rates offset this? We’ll see.

Another thing impacted by higher rates is the US Dollar. It has strengthened after the election and is likely to stay strong as long as long-term rates stay elevated.

This strengthening of the US Dollar, along with threats of imminent tariffs, has led to a weakening in emerging market stocks and a rather muted rally in foreign developed stocks.

But the difference in valuations between US and non-US stocks is rather stark. In general, investors are paying about 70% more for each dollar of earnings in the US than abroad. 

This disparity will converge at some point. It always does. 

Usually the outperforming asset class will have lackluster performance for several years while the underperforming one rallies hard several years in a row. Getting the timing right is impossible, so we maintain a globally diverse portfolio and rebalance on a regular basis, selling what is overvalued to buy what is undervalued. And we’re getting paid 4%+ in dividends while we wait.

One thing that has really seen a huge boost from Trump 2.0 is Bitcoin.

Everything bitcoin-related was up double digits today (11/8/2024). 

In general, I’m not a fan of cryptocurrencies. They are a solution for a problem that doesn’t really exist. There are many arguments for a decentralized currency but none of them apply to anyone who earns and invests in the world’s reserve currency – the mighty US Dollar.

The only real use case is to avoid income taxes, possibly avoid estate taxes, and defeat currency controls and tracking. 

However, the demand cannot be refuted. Bitcoin ETFs were approved nearly a year ago and have attracted billions of dollars in investor capital – some of it from public pension funds and family offices of extremely wealthy Americans.

The FOMO is real.

And Trump has even announced a Strategic Bitcoin Reserve, which will hold 1 million Bitcoins. This is a terrible idea. Nothing weakens US hegemony like America saying we don’t have faith in our own currency and we want to diversify away from it.

Against this backdrop, my own reservations notwithstanding, I’ve initiated a small position in a Bitcoin ETF in client portfolios. It’s part of our alternative sleeve, which is invested in funds that are expected to be uncorrelated to stocks and bonds. I expect this insanity to continue for a few more months. At that point, we’ll reassess the situation.

Expect the next year to be quite volatile for the stock, bond and foreign exchange markets. 

Despite this, the market’s reaction to a Trump presidency suggests a strong belief in a bullish economic outlook.

So, as always, keep calm and invest!

Please feel free to reach out if you have any questions or would like to discuss this further.

And, as always, keep calm and stay invested.

Nirav