What a Trump Win Means…
The American voters have spoken. Now ETF Strategist Bipan Rai breaks down how past elections have impacted the U.S. economy and provides several prudent ways to stay invested as the new leadership enters the White House.
November 2024
Key takeaways:
- Donald Trump’s first year in office saw the U.S. economy expand by 5% nominally and 3% in real terms, helping drive the S&P 500 higher by nearly 10% in the first six months of his administration.
- Trump’s 2024 platform was similar to 2016. However, we are currently at a different point in the monetary cycle (easing rather than tightening), implying less slack in the economy and a clearer path from Trump’s policies to potentially more inflation.
- U.S. equities, including small- and mid-caps, Quality, and dividend-oriented strategies, could be poised to outperform in 2025.
After much anticipation, the results are in, and Donald Trump will become the 47th President of the United States. What’s more is that the congressional races have been decided, and the Republicans have completed a sweep in both chambers (the House of Representatives and the Senate). Now, the focus shifts to what this means for the U.S. economy and markets moving forward.
For investors, the natural comparison point is the 2016 election – when Trump and the Republicans also completed a sweep of the legislature and executive races – and what it meant for markets in 2017. Indeed, Trump’s focus during his campaign was on tariffs, tax cuts, deregulation, and immigration (both legal and illegal). In broad strokes, that was basically the same platform that he ran on in 2016.
In 2017, Trump’s first year in office, the U.S. economy expanded by 5% nominally and 3% in real terms. Those are impressive numbers on their own, and primarily due to healthy private sector spending amidst the high degree of anticipation for the Tax Cuts and Jobs Act. In the labour sector, the unemployment rate fell by 0.6% over the course of 2017 as the economy added over 2.1 million jobs. Inflation remained close to the U.S. Federal Reserve’s (Fed) 2% target for most of the year.
That type of economic performance also helped drive the S&P 500 higher by nearly 10% in the first six months of 2017. Meanwhile, the U.S. dollar (USD) rose higher on a trade-weighted basis. In the rates space, U.S. Treasury (UST) yields rose across the curve as markets recalibrated expectations for the Fed in the front-end (2-year), while long-end yields (10-year) rose as markets reassessed expectations of UST issuance and long-term growth/inflation in the U.S.
Can we count on the same playbook this time around? There are some caveats to note, of course. For one, the Republican sweep of 2024 is a lot less shocking than it was in 2016. That tells us that investors spent a fair bit of time preparing for this result ahead of this past election. Second, we’re at a different point in the monetary policy cycle, as the Fed is easing from overly restrictive conditions now as opposed to tightening from overly loose conditions in 2016. What this implies is that there is a lot less slack in the U.S. economy now and a clearer path from Trump’s policies to potentially more inflation, which would force the Fed to keep rates restrictive for longer.
Having said that, there are still a few ideas and strategies that we see outperforming into the start of 2025…
1. Small-and Mid-Caps
Both did extremely well in the early part of 2017 (gaining at least 16%) and there are factors working in favour of these segments this time around, as well. For one, valuation for both should catch up to large caps. Second, tariffs should curb the degree of foreign competition at the margin. Third, the fundamental backdrop remains strong which points to a constructive profile for private sector consumption next year.
Investors who see an opportunity in taking an allocation in U.S. mid- and small-cap stocks might consider the BMO U.S. Small Cap Fund or the BMO U.S. All Cap Equity Fund, which provide exposure to U.S. securities of all market cap sizes, including small- and mid-cap stocks.
2. Quality
The combination of a strong economy and further potential rate cuts could be a powerful driver for U.S. equities. In this scenario, investors may consider the BMO Global Quality ETF Fund, which features a nearly 70% allocation to U.S. equities (as of October 31, 2024). Alternately, maintaining a core position in the BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) could help protect your portfolio in the coming months, as the Quality factor remains relatively consistent over different market environments.
3. Dividend-Oriented Strategies
As both the Fed and the Bank of Canada look to ease rates further into 2025, we expect front-end yields to remain capped to the upside. In Canada, we envisage further rate cuts than what the market is currently pricing in which should lead to a migration of flows out of money market and GICs.
In this environment, dividend-oriented strategies should outperform. As such, investors may consider the BMO U.S. Dividend Fund or the BMO US Dividend ETF (Ticker: ZDY), which provide exposure to U.S. dividend-paying stocks.
4. Hybrids
As with anything in the markets – there are no guarantees and it doesn’t take much for best-laid plans to go awry. For clients that are sensitive to market volatility, Advisors may wish to consider the BMO Strategic Equity Yield Fund, which has an 8% target yield (for the F series) with a low- to medium-risk rating.
5. Gold
Despite the initial pullback on the heels of the election, the outlook for Gold still looks fairly constructive in 2025. For one, Trump’s policies are likely to add to the inflation profile. Second, U.S. deficits look likely to continue expanding and/or remaining at record levels. Both imply potential headwinds for the USD and an increase in inflation premium towards the long-end of the yield curve – which increases the allure of Gold in investor portfolios.
The BMO Precious Metals Fund offers indirect exposure to gold via precious metal miners. Alternately, the BMO Gold Bullion ETF (Ticker: ZGLD) allows unitholders to get direct exposure to the price of gold bullion without having to buy or store the precious metal.
Chart 1 – How the Economy Did After Trump’s Election…
Source: U.S. Bureau of Economic Analysis (BEA), BMO GAM.
Chart 2 – Small and Mid Caps in 2017
*Indexed to 100 on November 7, 2016. (the night before the 2016 election)
Source: Bloomberg, BMO GAM.
Funds at a Glance
| Fund | Code | Series Code MER (%)* | Risk Rating2 |
|---|---|---|---|
| BMO U.S. Small Cap Fund - F | BMO95214 | 0.87 | Medium to high |
| BMO U.S. All Cap Equity Fund - F | BMO95115 | 0.82 | Medium |
| BMO Global Quality ETF Fund - F | BMO95263 | 0.51 | Medium |
| BMO U.S. Dividend Fund - F | BMO95219 | 0.84 | Medium |
| BMO Strategic Equity Yield Fund - F | BMO95290 | 0.70 | Low to medium |
| BMO Precious Metals Fund - F | BMO95147 | 1.10 | High |
*Management Expense Ratio (MER) is as of March 31, 2024.
Performance (%)
Fund |
1-month |
3-month |
6-month |
YTD |
1- Year |
3- Year |
5- Year |
10-Year |
Since Inception |
Inception Date |
1.9% |
-0.2% |
12.6% |
22.5% |
38.3% |
11.2% |
15.0% |
— |
11.4% |
May 14, 2018 |
|
3.2% |
7.2% |
17.9% |
30.3% |
44.4% |
11.6% |
- |
— |
13.9% |
June 1, 2021 |
|
-0.1% |
1.9% |
12.1% |
24.3% |
35.2% |
- |
- |
- |
20.8% |
May 30, 2022 |
|
0.9% |
2.8% |
10.7% |
21.6% |
33.1% |
10.7% |
11.4% |
— |
11.5% |
November 13, 2014 |
|
0.2% |
2.5% |
6.0% |
8.3% |
14.0% |
- |
- |
- |
5.7% |
June 16, 2023 |
|
6.7% |
12.2% |
27.7% |
40.8% |
49.1% |
13.6% |
9.7% |
12.6% |
10.2% |
June 24, 2013 |
BMO Global Asset Management, as of October 31, 2024.
Performance (%)
Fund |
1-Year |
2-Year |
3-Year |
5-Year |
10-Year |
Since Inception |
Inception Date |
39.32 |
31.31 |
14.13 |
17.68 |
— |
16.79 |
November 5, 2014 |
|
30.16 |
14.42 |
11.93 |
9.67 |
11.40 |
13.19 |
March 19, 2013 |
|
Returns are not available as there is less than one year’s performance data. |
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BMO Global Asset Management, as of October 31, 2024.
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This article was published on November 29, 2024.
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