Last month’s surprising election result was greeted by numerous seemingly unexpected market responses including a rise in long-term bond yields as well as drop in defensive (e.g., Consumer Staples) and rise in cyclical (e.g., Financials) stock prices, respectively. On further reflection, some of these market reactions make sense in light of the Keynesian pro-growth and anti-regulatory direction the new administration appears to be favoring. In contrast, a troubling policy direction aims to "shield" the US from the dislocational effects of globalization and technological change by curtailing trade and micro-managing selected industries regarding their production decisions. These are antithetical to a Darwinian-like natural selection process that is the hallmark of a dynamic capitalist system and thus not a positive role for government in a free economy.
Stimulatory fiscal policy (including rising debt levels) and greater micromanagement of aspects of the economy will result in a much sharper divide between winners and losers going forward. Near term, this will favor cyclicals over defensive and growth stocks that are more sensitive to rising rates. Longer term, avoiding potential secular laggards remains a critical concern notwithstanding any near-term policy tailwind they get. (See our previous feature – Is Obsolescence Priced In?).*
*Yoav Benari, “Optimal Asset Mix and its Link to Changing Fundamental Factors”, The Journal of Portfolio Management, Winter 1990.
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