Trump euphoria has clearly taken control of the U.S. stock market since Donald Trump’s surprising and historic victory on November 8, 2016. As of the close of business on December 9, 2016, the S&P 500 index has risen 5.84% and the Dow Jones Industrial Average has climbed 8.15%, both on a total return basis, since Election Day – both reaching all-time respective highs. With many market analysts believing that a Trump administration would be a positive for economic growth potential, many analysts also currently believe that the Federal Reserve (Fed) should feel comfortable beginning to embark upon their long awaited gradual period of tightening, with a rate hike of 25 basis points (i.e. 0.25%) to be expected after their upcoming meeting concludes this Wednesday, December 14.

The confluence of these two scenarios begs the question of how investors might want to consider positioning their portfolios looking ahead, recognizing of course that portfolios should be constructed and managed consistent with the specific objectives, risk tolerance and investment timeframe of each investor. Accordingly, we have researched both scenarios to observe; a) which asset classes and/or sectors are expected to perform relatively well during a Trump presidency and b) which asset classes and/or sectors have historically performed relatively well during previous periods of gradual interest rate increases.

First looking at the next four years under President-Elect Trump, absent any specific proposals or introduced legislation, we look to “Donald Trump’s Contract with the American Voter” for indications of what areas of the market could potentially benefit from his stated beliefs and desired directives. In this regard, we highlight below a few of the key areas from our perspective, along with the potential benefiting asset class/sector(s), with the understanding that all of these initiatives are subject to change and may not come to reality or deliver the intended results:

• Lifting of restrictions of American energy reserves, including shale, oil, natural gas and oil (U.S. Equities/Energy)
• Allowing energy infrastructure projects to move forward and spurring infrastructure investments (U.S. Equities/Energy, Materials & Industrials)
• Repairing of America’s water and environmental infrastructure (U.S. Equities/Materials & Industrials and U.S. Fixed Income/Municipals)
• Repealing and replacing of Obamacare (U.S. Equities/Health Care)
• Speeding the approval process of life-saving medications in relation to the 4,000 + drugs currently awaiting approval at the Federal Drug Administration (U.S. Equities/Health Care – specifically Biotechnology)

Looking next to future interest rate activity, we currently believe that there will be one 25 basis point interest rate hike in 2016, likely announced after the upcoming December Federal Open Markets Committee (FOMC) meeting as previously discussed, leaving the Federal Funds Target Rate in the range of 0.50% – 0.75% at the end of the year. When the Fed does restart its tightening program, we, at Hennion & Walsh, believe that they will likely follow a similar blueprint to the one that the Fed utilized during the 2004-2006 tightening period when they gradually raised the Federal Funds Target Rate on 17 different occasions, in 25 basis point increments, over this timeframe. The only difference during this round of tightening that we see is that the Fed may also consider starting to slowly shrink the size of their U.S. Treasuries and Government Agencies securities laden balance sheet over time, in conjunction with gradual increases to the Federal Funds Target Rate. Sectors of U.S. Equities that performed relatively well during the 2004-2006 timeframe include:

• Energy
• Utilities
• Telecommunication Services
• Financials (ex. Real Estate Investments Trusts (REITs). It is important to note that REITs were previously a part of the Financials sector but as of August 31, 2016, are a part of their own Real Estate sector within the Global Industry Classification Standard (GICS), with the exception of Mortgage REITs which still are a part of the Financials sector)
• Materials
• Industrials

Some sectors that appear to overlap the two scenarios include energy, materials and industrials, in addition to Financials, which is not listed in the Trump scenario but is another sector that many believe should benefit from a Trump administration. Not surprisingly, several of these sectors have raced upwards since Trump became President Elect as certain investors have made efforts to reposition their portfolios. However, investors, in our view, should be careful to not try and chase returns in this environment and be mindful of valuations and potential choppy waters ahead. While optimism is currently in abundance, the days of short-term bouts of market volatility are not behind us and investors would be wise to maintain discipline as well as asset class, market capitalization and geographic diversification within their portfolios as appropriate.