The Atlanta Journal-Constitution
‘Trump trade’ demands caution — and optimism
Most economists expect U.S. economy to continue to improve.
There is giddy optimism right now among many investors and business owners about the opportunity to grow their wealth under President Donald Trump. With the expectation of lower corporate and individual taxes, coupled with fewer regulations on business, many people believe their investments are destined to skyrocket in 2017.
Some enthusiasm is justified. Most economists expect the U.S. economy to continue to improve. Corporate profits – historically the driver of increased stock prices – are projected to show strong growth in 2017, after declining throughout most of last year.
But before penciling in big gains, investors need to consider how several factors may impact their portfolios.
First, the stock market has had one of the biggest bull runs in history, with the Dow Jones Industrial Average gaining nearly 200 percent since its lows in 2009. With the stock market near record levels, it may be difficult to achieve significantly higher gains any time soon.
Next, despite President Trump’s pro-business agenda, potential executive action or new legislation on issues ranging from the Affordable Care Act to tariffs on foreign imports are likely to cause stock market volatility. Don’t be surprised if the market sways back and forth if there are prolonged, intense debates over important issues. These debates may also affect individual companies – especially if a company is the target of one of President Trump’s early morning tweets.
To help achieve steady gains in your investment portfolio this year and beyond, here are a few recommendations:
Maintain a diverse portfolio of global stocks. The run-up in U.S. stocks since President Trump’s election has boosted the net worth of many investors. But remember to base your strategy on long-term goals that will generate the gains needed for retirement or other objectives. Investing in a globally diversified portfolio may not generate returns that always beat U.S. market averages, but it can reduce the risk of your investments.
Still be “overweight” in U.S. companies. U.S. stocks have outperformed international stocks during the past five years. And despite record highs for the major U.S. indexes, the combination of higher economic growth and an increase in inflation could bode well. With Brexit and upcoming elections in Europe, there is some concern about how these economies will fare. Finally, countries that make up “emerging markets,” which rely heavily on exports for growth, face uncertainty as President Trump considers increasing tariffs on some imports.
Take advantage of volatility. Investors have one job – to buy low and sell high. As the new administration moves to enact its programs, there will likely be opportunities to buy stocks of large, fundamentally sound companies or industries that may briefly fall out of favor. And there is always the chance of a market correction. Be ready to buy these stocks if they fall; in a highly volatile market, astute investors can generate high returns.
Invest in short-term bonds. With the Federal Reserve’s announcement in December that it intends to raise interest rates three times in 2017, short-term bonds make sense. These bonds, which usually mature in one to three years, enable investors to take advantage of rising interest rates. As interest rates move up, the proceeds from these bonds can be reinvested at new, higher rates.
Buy corporate or municipal bonds instead of U.S. Treasury bonds. Bonds issued by major corporations offer higher yields than comparable government bonds with less risk than stocks. With the continued projected growth in the U.S. economy, corporations should perform well, allowing these bonds to provide steady income. For people in higher tax brackets, municipal bonds help ease the overall tax burden since income generated is exempt from federal income tax. These bonds sold off after the election on hopes of coming tax cuts, making their new, lower prices a more attractive entry point.
With stock prices high, it’s important to keep in mind that there is a limit to growth. Smart investors know that setting a plan with a long-term view can help generate growth to meet their goals. Even if the growth is slow, don’t deviate from your plan – because that’s usually when you get in trouble.