To say that Donald Trump's presidency will be unpredictable is likely an understatement. But what about his impact on the U.S. economy and markets?
Investors who haven't yet jumped aboard the "Trump bump" bandwagon are likely wondering which sectors might benefit from four years of a Donald Trump presidency. Will it be industrials, materials, aerospace and defence? What about energy and small caps?
Investors who adopt sector-rotation strategies in their portfolios to reap the rewards of "The Donald" in the White House are likely to face a bumpy path.
"It will be a bit of a volatile ride because that's the nature of Trump," says Brooke Thackray, a research analyst at Horizons ETFs Management Canada whose focus is technical analysis and seasonal investing. He is also instrumental in management of the Horizons Seasonal Rotation exchange-traded fund.
"It's like an invention," Mr. Thackray says. "A lot of times when a new invention comes out everybody jumps on board and overestimates the impact for the short term, but they underestimate long term, the consequences that could happen."
Markets rallied after Mr. Trump's election. The surge has largely been credited to the idea that Republican control of the White House and Congress would allow for easy implementation of personal and corporate tax cuts as well as increased deregulation, especially of the financial industry.
Yet the Trump bump hasn't resulted in much of a jump in equity prices when compared with other short spans over several decades, Mr. Thackray says.
"Since election day to the end of the year, the S&P 500 rose 4.6 per cent," he says. The market has gone up that much or more over one-month periods about 120 times since 1950, he says.
Still, financials rose 12 per cent during the same period, and small caps increased by more than 9 per cent.
But industrials, energy and materials – other so-called "Trump sectors" – didn't do that much better than the broad market, he says.
Anyway, investors trying to jump aboard the Trump train have likely already missed it, says Murray Leith, director of investment research at Odlum Brown Ltd in Vancouver. Much of the anticipated effects of a Trump presidency had already been priced into the market in the days following the election, he says.
For the long term, President Trump's platform could be beneficial to the industrials and materials sectors if he gets a massive infrastructure spending plan through Congress.
In addition, personal and corporate tax cuts will likely benefit smaller businesses in the United States. Consequently the small cap sector may outperform the broader market, which is weighted heavily in multinational firms, which have been able to seek out greener taxation pastures, such as Ireland.
"Tax reform would be the biggest and most beneficial change over the medium and long term, but it won't hit the economy in the next 12 months," Mr. Leith says.
Increased infrastructure spending could rev up the commodities sector at a time when they seem poised to rebound from their bottom of a down cycle, says Greg Schnell, a Calgary-based senior technical analyst at StockCharts.com.
Commodities appeared ready for a rally even before Mr. Trump's election, Mr. Schnell says, and enactment of his agenda should only add to the demand.
That said, he warns investors against buying straight commodity ETFs, which are too unpredictable. They should look to ETFs that hold companies that produce and refine raw materials instead.
Yet even this strategy has its risks, as President Trump's policies are expected to cause inflation, which in turn would likely prompt the U.S. Federal Reserve to raise interest rates. That will increase the value of the U.S. dollar, which ultimately hurts commodities because they're priced in U.S. dollars.
Expensive commodities would also hurt emerging markets, which are commodity-dependent and increasingly important to global growth, Mr. Thackray says.
Yet even this chain reaction, which is based on previous market history, is by no means assured. Investors should expect the unexpected when Mr. Trump is involved.
"It's going to be an extraordinarily volatile time in the marketplace," he says. "It's better [for investors] to keep doing what you're doing, and maybe you can favour the Trump sectors a bit because the implications over the long term are they should benefit. But making whole-hearted changes to a portfolio just to accommodate Trump" doesn't make sense.
Mr. Leith is even more agnostic about a Trump presidency. He suggests investors mute expectations for the president's policies and adopt a bottom-up strategy in which they select good companies with dominant market positions. He points out that global growth more than ever stirs U.S. markets because so many firms do business outside the United States.
And two macroeconomic barriers – consumer indebtedness and an aging population – will likely dampen that growth and much of the upside of Mr. Trump's economic policy along the way.
"We don't think there's reason to get excited about the outlook, nor is there reason to be fearful that there is a recession around the corner." He suggests that if Mr. Trump's policies work, investing in a broad-based U.S. ETF – such as those that track the S&P 500 – should still prove fruitful.
"Pick businesses that you think are going in the right direction for the next five to 10 years," Mr. Leith says, "and don't let who is residing in the White House knock you off strategy."