Like many financial advisors, Brian Stephenson was bracing for a flood of calls from clients seeking advice and reassurance on the Wednesday after the election. After all, reasoned the managing partner at Black Stone Partners in Exton, Pa., the stock market had been more volatile than usual in the weeks leading up to the election.

And just before November 8, when Donald Trump’s poll numbers surged, it dipped again. Judging from pre-election activity, it seemed almost certain that a Trump victory would be bad news for the stock market.

Except that it wasn’t. Instead, the stock market notched several days of post-election gains, and the flood of calls that Stephenson expected never materialized. “I guess people thought that Trump would create a favorable environment for business, and the trickle-down economics would work,” he observes. After pausing for a moment, he adds, “I would tend to agree with that.”

The stunning upset by an outsider who trounced both the Democratic and Republican establishments also produced positive surprises for ETFs. Between election day and the following Thursday, stock ETFs had inflows of $22.6 billion, according to TrimTabs, representing the highest influx over such a short time since September 2007.

Like the election itself, the potential reaction of the markets to a Trump presidency defies prediction. With uncertainty in the air, ETF strategists continue to assure clients that they are crafting portfolio strategy based on the market and economic influences in place before the surprising election results. At the same time, some are making tweaks around portfolio edges to capitalize on changes that the new president’s administration might bring, or to navigate areas that may be susceptible to extreme volatility or a downturn.

For some advisors, the main goal for now is maintaining a steady eddy approach and assuaging client angst that could crop up. “I’m advising our clients to stay the course,” says Chuck Self, chief investment officer at iSectors, a firm that designs asset allocation models for financial advisors. “Even if the GOP comes together and decides on major changes, it’s going to be at least late 2017 or 2018 before anything has an impact on corporate earnings.”

Given slow economic growth, and the fact that Federal Reserve chair Janet Yellen’s term is not set to expire until 2018, Self believes many investors are overestimating the potential for substantive rate increases in 2017. In the near term, he believes, sluggish corporate earnings are more of a concern. “There’s been a decent upside in stocks this year without an accompanying earnings increase to back it up. Unless earnings start accelerating, we could see a market correction of 10% or more in 2017.”

He believes one sector where the Trump effect could eventually yield positive results is technology. Ever since the recession, many companies have been busy shoring up their balance sheets and spending less than they have in the past on technology upgrades. If Trump lowers corporate taxes, as he has proposed, companies would likely ramp up spending in that area. Self likes the iShares North American Tech ETF (IGM) as a core technology sector play. Unlike many ETFs, which are heavily weighted in Apple and Microsoft, this one has an allocation of less than 10% to each of these companies, making it more diversified. It also has holdings throughout North America, rather than just in the U.S.

Ron Weiner, a managing director at RDM Financial in Westport, Conn., isn’t losing sleep over the implications of a Trump presidency on the financial markets, or about how the protectionist trade views espoused during his campaign might affect U.S. multinationals selling goods overseas.

“At the end of the day, he’s not going to ruin the ability of U.S. companies to do business in other countries or limit U.S. exports,” Weiner says. “I can’t imagine a world with 30% tariffs and trade wars.” From Weiner’s standpoint, global growth will trump politics as a major influence on world markets. “More middle class people around the world are buying iPhones, razor blades and toilet paper, and that’s a powerful force,” he says.

Nonetheless, the uncertainty of a new administration prompted his firm to move in a bit more conservative direction in the last half of the year for a small portion of its equity positions. One purchase his firm made during the period was the PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV). The ETF is based on an index of 100 S&P 500 companies that exhibit both low volatility and low interest rate risk by eliminating interest-rate-sensitive sectors such as utilities and real estate investment trusts.

Another addition, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL), is a basket of 40 stocks that have raised dividends for at least 25 years. Its largest sectors are consumer staples, industrials and health care. The theme with these ETFs, he says, is their ability to weather storms and build in more predictability. He’s also considering adding a financial ETF to the portfolio, which he believes will benefit from any rate hikes in the coming year. And he’s considering a purchase in the pharmaceutical sector, since the possibility of fewer strict regulations in that industry could benefit drug companies. 

Stephenson says that while he isn’t making changes to portfolios as a direct result of the election results, his firm is prepared for the possibility of a stock market downturn. “It’s been a long time since we’ve seen a severe market correction, so we’re setting clients up so they don’t have to live through another 2008.” With that in mind, the firm has a portion of client portfolios in the Pacer Trendpilot series of ETFs, which move fully or partially into cash when their respective indexes trend below a specified level for a specified period of time.

Sponsor Reaction: Calm To Jittery
ETF sponsors are taking a variety of stances on the topic of a Trump presidency. Some have barely mentioned it at all on their websites, while others have stuck mainly to offering reassuring commentary for financial advisors and investors. “While the often-contentious presidential election is over, your clients may still be worried about how a leadership change in Washington will affect their portfolios,” says Jonathan Lemco, a senior strategist in Vanguard’s Investment Strategy Group, on Vanguard’s website. “While presidential elections do add a layer of uncertainty—and the markets don’t like uncertainty—they typically don’t have a long-term effect on market performance.”

To underscore the point, the firm posted a video for advisors on the topic of how to address client concerns about the election results (advisors.vanguard.com/election).

Others offered similar calls for calm heads, but also opined on what a Trump presidency means to the economy and markets. In a bulletin, “U.S. Election: Trump Win,” fund sponsor BlackRock observed that Trump’s opposition to the “low for longer” monetary stance of the Federal Reserve could lift interest rates, particularly if current board members are replaced over the next few years. Steeper yield curves could pressure “bond proxies” such as utility stocks, while cyclical and value stocks could outperform.

Furthermore, health-care stocks could do well because of perceptions that a Trump administration would exert less pressure to lower drug prices, although media and political scrutiny and uncertainty about the fate of health-care reform might temper enthusiasm for the group. “We could see relative outperformance by financial stocks in the medium term amid higher inflation and steeper yield curves,” the BlackRock bulletin noted. “We generally see U.S. regional banks as a bright spot. Proposals to reduce their regulatory burden could help them grow faster and return capital to shareholders.”

A Northern Trust Asset Management report highlighted sectors that stand to benefit from Trump policies. Industrial and commodity companies would be major beneficiaries if the president-elect’s proposal to invest $500 billion in infrastructure gains traction. His anti-free-trade stance and promises to impose new tariffs would give a boost to the U.S. steel industry. Regulatory relief would be particularly helpful for smaller regional banks. And increased access to onshore and offshore acreage and less restrictive regulations would drive up project development for oil field services companies.

State Street Global Advisors (SSGA) issued what was perhaps the most critical commentary and warned that trade protectionism and limits on immigration could exacerbate inflation. “Curbs on imports through tariffs or quotas remove the safety valve of imports on domestic prices, while immigration provides a safety valve for removing upward pressure on wages,” noted SSGA chief economist Christopher Probyn in a report titled, “What Trump’s Upset Win Means For Markets.” “It seems inevitable that the U.S. is putting globalization on hold at least for a while after 70 years of fostering a more open, global trade environment that lifted hundreds of millions out of poverty in the emerging world and benefitted global consumers.”

Michael Arone, SSGA’s chief investment strategist, said in the report he believes many investors are overallocated to long-maturity fixed-income or bond proxies anchored in a low-growth, low-rate environment at a time when the market seems to be pivoting in a different direction. “We suggest investors revisit their inflation hedges and other defenses that help manage interest-rate or equity volatility, such as global natural resource stocks or commodities, gold, TIPS, etc. It may be time to begin to shift some of the overweights on long-dated fixed-income and bond proxies to assets that might in fact benefit from a rising rate, rising inflation environment.”