(Bloomberg) — For investors looking past the initial risk-on rally in US equities following Donald Trump’s decisive election victory, now comes the hard part.
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The Republican president-elect made plenty of campaign promises: steep tariffs, tax cuts, business-friendly deregulation and tighter immigration laws, to name some. For investors who plowed into stocks last week on speculation Trump’s policies will bolster the economy, the challenge is to figure out which sectors will get a lasting boost.
Tariffs, for example, could spark inflation and hurt large multinational firms, while potentially helping domestically oriented small-cap stocks. However, an immigration crackdown risks lifting labor costs, likely squeezing smaller businesses. Meanwhile, a friendly stance toward traditional energy that lifts production might drive down oil prices, and efforts to reverse President Joe Biden’s policies designed to help the clean-energy and electric-vehicle industries could have a hard time getting through Congress.
“I expect active investors to start using a scalpel to sift through at industry levels to see which companies and industries might benefit now,” said Eric Clark, a portfolio manager at Accuvest Global Advisors. “In time we will get more data points on what will actually be implemented and how to play that.”
Clark has already acted on some opportunities. As banks, industrials, energy and big-technology stocks pushed the equities market higher on Wednesday, he sold some tech and financial shares. He also bought stocks in luxury retail and consumer staples — which were in the red amid the surge.
Clearer Picture
Small-cap stocks rallied last week, and they appear to be in a sweet spot as traders assess the potential policy backdrop ahead. These companies, which make most of their revenue at home, stand to benefit from heightened protectionism. A possible corporate-tax cut should also help.
Trump has proposed a 10% to 20% across-the-board levy on imports, and as high as 60% on China-made goods. The prospect that at least some tariffs will come to fruition helped drive the Russell 2000 Index — a benchmark for small-cap stocks — up 8.6% last week. Digital payments company Sezzle Inc., one of the gauge’s top gainers, doubled during that time.
Financial stocks are also seen as being in a strong position, given Trump’s pledge to make changes to regulatory bodies that have pursued tougher banking rules under Biden. As Wells Fargo & Co. bank analyst Mike Mayo sees it, a new era of deregulation could boost Wall Street profitability. Shares of Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. soared on Trump’s victory.
