Trump’s Victory Playbook: The Sectors Set to Thrive

Stocks rallied on Friday as exuberance for what could be spilled over from Tuesday night's election results. Respondents to University of Michigan's Consumer Sentiment survey also had high hopes for the future, pushing the composite index higher and far beyond economists' estimates.

Please don't stop the music, please don't stop the music. You're at a friend's wedding, and happiness and excitement fill the air. The band is fantastic, the crowd is pumped, the dancing intense. Drinks are flowing, and the music gets louder and louder. You ignore the growing pain in your feet as your shoes tighten. You promise this will be your last dance, but then the band rolls out another favorite. A faster tempo. The crowd screams the chorus at the top of their lungs. Your voice barely functions, and you're drenched with sweat, but you simply cannot stop. You've lost track of time, and suddenly, as if by accident, the music abruptly stops, and the lights come on. Everyone looks around, surveying the dance floor. Makeup is smudged, and once-beautifully coiffed hair now resembles a bird's nest. The party is over. Or is it just beginning?

Well, folks, last week was a raucous party for the equity markets.

The celebration was prompted by a pro-growth President winning the White House and his party taking control of the Senate. What's more, the celebration was turbocharged by a decisive win with no shenanigans necessary. The losing party conceded with dignity. By midday on Wednesday, some big unknowns became knowns. That set the stage for the afterparty, which was Deejayed by the Chairman of the Federal Reserve. He and his gaggle of bankers gave the market what it wanted: another rate cut. That rate cut took a bit of the sting out of traders' swollen feet.

On Friday, we got a data point from the University of Michigan Sentiment release. The topline number showed a marked increase over October's sentiment. But if we break it down, we note a decrease in sentiment about current conditions and a massive increase in future expectations. Hmm, wouldn't you say that release sort of reflects the market's sentiment based on trading behavior post-election?

Okay, okay, calm down. Let's take a step back and remember that the Guy won't even take office until January. But that's okay for investors because we're thinking about the future. So, what will the future hold, and which sectors can we expect to perform well under Trump 2.0 with a Republican Senate and a still up-for-grabs House? Ready for rapid fire? Here we go.

There are 11 sectors. Pay attention.

Energy: Everyone thinks the sector will perform well under Trump due to decreased regulation. This is a common expectation, but if you look back in history, energy has actually performed better under Democratic presidents. Have you heard the "drill baby, drill" quote? Well, I'm not sure Trump himself ever said it, but it's been a part of the Republican mantra since at least the early 2000s. Super-quick economic note: more supply pushes down crude prices, which isn't great for energy company margins. However, if we drill (pun intended) down to the Coal & Consumable Fuels sub-industry, that's where we might find opportunities to benefit from deregulation.

Materials: This sector could benefit from infrastructure initiatives. Interestingly, much of the money pledged during the Biden administration is just getting doled out now and will be spent after Trump takes office. This sector also includes building materials, which would benefit from any incentives for housing development.

Industrials: Never mind the obvious America First thing. How about the even more obvious fact that Defense fits into this sector? Defense spending is on the rise and will likely continue under the next administration, which historically devotes more dollars to defense. Given potential escalations abroad and a Big Stick Policy 2.0, it's reasonable to assume that defense stands to benefit. As for industrial machinery, we need to look closely at companies' reliance on foreign buyers. Tough trade policies and a stronger dollar will surely pressure those companies.

Consumer Discretionary: If you suddenly had extra money in your paycheck, you'd save it all, right? I'm sure you'll save some, but you're also likely to spend some on STUFF from and through companies in this sector. Consumer sentiment is on the rise, which is a good leading indicator of consumption-my favorite topic since it represents two-thirds of GDP. Did you know people spend more when the stock market is up, even if they don't own stocks? This sector benefits from that, assuming the market continues to rally.

Consumer Staples: Let's just say this one will sit on the bench unless things start to go sideways for the economy. That doesn't mean it won't perform well with a broader market rally; it just may not lead the charge.

Healthcare: This is a tough one with much uncertainty around a Republican-heavy White House and Congress combo. Some industries in this sector might benefit from relaxed M&A regulations (pharma and biotech), while others could face challenges if Medicare is impaired. This sector, which didn't partake in last week's partying, likely warrants a wait-and-see approach-it might just be a value trap.

Financials: This sector is all about deregulation and potential tax reforms. It also helps that short-term interest rates are on the decline due to Fed policy. Though common wisdom suggests banks perform poorly with lower rates, they're actually more sensitive to the spread between long-term and short-term rates. Traditional lending banks make more money with a steeper yield curve, which we might see this cycle. Further, full-service financials earning investment banking fees could benefit from an uptick in deal-making in a potentially less regulated environment. In simple terms, more M&A deals mean more fees. This sector has closely tracked Trump's election prospects and may continue its run, though many of its superlative stocks are already a bit overbought, so investors may need to be patient.

Information Technology: This hot sector will likely continue thriving with lower taxes, lower rates, and incentives to stay in the U.S. But there are caveats. Many tech companies rely on foreign partners for production and customers. Strict trade policy can drag down recent high-flyers. Monitoring supply chains is crucial, especially if trade tensions ratchet up. To be clear, by "drag", I mean slightly muted, not at all sidelined.

Communication Services: Deregulation could benefit this sector, which includes not only traditional telecom giants but also media darlings that have faced scrutiny from the DOJ and FTC. A business-friendly administration might help minimize negative effects from ongoing legal challenges.

Utilities: This sector is a go-to during economic strife and declining interest rates. However, higher long-term bond yields could weigh on performance. Plus, many utilities have invested in renewables, which may not be prioritized by the new administration favoring traditional energy.

Real Estate: This sector could benefit from the current interest rate regime. Additionally, Trump proposed incentives for the sector that, if realized, could boost builders. However, this sector is highly sensitive to interest rates, which remain a moving target.

So, there you have it-your super-high-level guide to all the sectors. You probably noticed that I didn't specifically say "buy this" or "sell that." That's because we still don't know what specific policies will emerge. The markets have been factoring in potential outcomes, but much remains uncertain.

Assuming-just assuming-that President-elect Trump and Congress can deliver on even a few promised tax reforms and deregulations, and if the economy stays healthy, it's reasonable to expect current trends to continue. However, last week's moves were substantial, so expect some volatility and sideways trading until the new lawmakers are seated and policies become clear.

Bonus analysis ➡️ One of my favorite charts to follow leading up to the elections was tracking how certain sectors, industries, or financial instruments reacted to changes in Trump's election prospects. For this, I used the Real Clear Politics Polling Averages. In most cases, you can spot clear patterns showing positive and negative correlations. For example, based on the uncertainty expected in healthcare, as mentioned above ☝️, we would expect a negative relationship, and indeed, the chart shows a clear inverse relationship. Conversely, sectors expected to thrive under a new President Trump demonstrate a positive correlation.

For now, two things are clear: the market is relieved the elections went off without a hitch, and they've anointed a pro-business President. Let me quickly sum up your key takeaways.

• Be selective rather than all-in
• Focus on sectors that may benefit from a Trump 2.0 / Republican Senate / maybe Republican House
• Be cautious about overbought areas; they may benefit from Trump, but a lot has already been factored in
• Avoid defensive plays unless economic conditions shift
• Get ready for some volatility as this boatload of information gets processed by the market
• Look for data-driven signals - they tend to be right most of the time
• Not all companies in a sector are the same. Though I think it should be obvious, focus on companies that have the right stuff

And now my summary of sectors. You may find growth opportunities in Energy (particularly in Coal & Consumable Fuels), Industrials (specifically Defense, be careful with machinery), Financials, and Tech in Information Technology and Communications Services (beware of trade sanctions' effects on the former). Please be cautious when considering investments in Healthcare ("wait and see" with providers, pharma and biotech may have upside), Consumer Staples, Utilities, and Real Estate (watch rates and policy carefully).

The lights are on. Your ears are ringing. You have no idea where you left your jacket. You look around and say to your partner in a hoarse voice, "this place isn't as much of a mess as I thought it would be."

FRIDAY'S MARKETS

NEXT UP

• No major economic releases today, but later this week we will get Consumer Price Index / CPI, Producer Price Index / PPI, Retail Sales, Industrial Production, and still a bunch more earnings announcements. Get ahead of the competition and download the attached earnings and economic calendars for times and details of the releases coming up.
• Bond markets are closed in observance of Veterans Day. With that, let's not forget that we enjoy the freedom to do what we do because of the sacrifices of our veterans, not just today, but every day.

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