Opportunities, risks and challenges for investors after the presidential election

Ivanna Hampton: Donald Trump returns to the White House. The Republican defeated Democrat Kamala Harris and won the US presidency for the second time. According to the Associated Press, the GOP regained control of the Senate while the House remains in limbo.

What could the change in political leadership in America mean for investors? Dave Sekera is a senior US market strategist for Morningstar Research Services. Nice to see you, Dave.

David Sekera: Good morning, Ivanna. What a morning it was.

Hampton: It has been. President-elect Trump will return to DC and his party controls at least one chamber of Congress. How are the markets reacting? Let's timestamp this conversation. It's November 6th, almost 10:30 am.

Sekera: Well, we're definitely seeing the rise of Trump this morning. In fact, even overnight futures soared before the market opened. After the open we saw a slight softening, some people took profits, but for now it looks like stocks are going up again. So depending on the index you're watching, it looks like the markets are currently up about 2%, give or take. Across the board, large cap, small cap, mid cap, everything is up. Value stocks, growth stocks, but I want to highlight that small cap stocks are actually gaining the most. And of course, this is the one area of ​​the market that we've highlighted for some time as the last area of ​​the market that we thought was truly undervalued. Trading at a large discount to intrinsic valuations.

Looking at what else is going on here, I think a lot of it is really just the expectation that under his administration we will continue to see the corporate tax cuts that he introduced under his previous administration, they will be extended, so that these do not end up disappearing. And if they actually gain control of the House of Representatives, more tax cuts could pass, whether they're corporate or personal tax cuts.

And of course, if he imposes the tariffs, many people assume that it could be negative for the economy from a GDP perspective. It could also lead to some inflationary pressure. But from a stock perspective, this could actually help companies with pricing power generate additional earnings growth. So if they're able to pass on those costs and grow their revenue, maintain their operating margins and maintain the same volumes, that actually benefits their earnings. This also applies very well to companies with large economic moats, especially those with pricing power this morning. And of course, just the expectation of potentially looser regulations and a looser policy stance from this government toward businesses is also a tailwind in today's market.

Let's look at the bond market: Bonds are actually being crushed this morning, well, especially long-term bonds. So we see that the 10-year Treasury yield is currently around 4.45%. Since the Fed cut interest rates by 50 basis points, the momentum has actually been negative. But that is also a big step in a single day. And of course if the value goes up too much, if we actually go above 4.5, towards 5.0, then that would actually worry me from a market perspective in stocks.

And finally, if I just look at the US dollar, there is a significant appreciation in the US dollar today that will actually be beneficial for consumers. So if there were actually tariffs, that stronger dollar would actually help offset some of the impact of those tariffs.

Hampton: Well, what are you looking for in the coming days? What do you expect?

Sekera: To some extent, we're watching what happens to the House of Representatives, whether it goes and stays in Republican hands or goes into Democratic hands. But to a certain extent, I would also say to investors that you should really ignore a lot of this short-term noise right now. Really focus on the fundamentals, really focus on what these policy changes will look like when they come into effect. Of course, just because a politician stumbles over something during the election campaign doesn't mean that it will necessarily be done. Most likely it will be watered down before it is actually implemented anyway.

So basically, we'll stick with our long-term valuation analysis for now and look at where stocks are trading relative to their intrinsic valuations. And when I look at the market today, with today's rise, it's probably trading at a 3-4% premium over fair value. Now many investors may say, “Eh, 3% to 4% doesn't sound like much from a market perspective,” but when I look at our valuations from 2010, it's less than 20% is traded at such a high premium or more. So I would say again that when I break it down into the different categories, value stocks still seem to be a more attractive part of the market as they trade fairly close to fair value, while growth stocks still trade at a very high be traded at a premium. In fact, when I look at growth stocks, they have rarely ever traded at such a high premium or more. Therefore, now could be a good time to take a look at the growth stocks in your portfolio, look for particularly overvalued and stretched stocks, and today could be a good day to make some profits on some of these stocks. And then of course the small cap space, which we believe is still the most undervalued part of the market despite today's rise.

Hampton: How does today's recovery compare to the recovery when President-elect Trump first entered the White House?

Sekera: I think it's very different today than what we saw back then. So today we're looking at stocks that are already fairly fully valued, maybe even slightly overvalued, coming into this morning, whereas back when he was first elected, the stocks were actually trading at a pretty big discount to value that we thought they should have been evaluated. I think it's a lot easier for the market to move forward at this point than I think the market needs to move today.

Hampton: And what should investors pay attention to? Where are the possibilities? What are the risks or challenges?

Sekera: Yes. Again, elections have consequences, but I also want to point out that those consequences may not always be what you think. And even if this is the case, I would note that valuations in the market have often already priced this in. So if investors haven't read it yet, I highly recommend taking a look at John Rekenthaler's articles. He wrote one not long ago comparing what happened under the Trump administration and the Biden administration regarding clean energy and oil stocks. Under a Trump administration, one would expect oil stocks to perform better and clean energy to perform worse, but in reality the exact opposite has been true. And in fact, under the Biden administration, those energy or oil stocks did much better and the clean energy stocks did worse. So, again, it's one of those things that was about the valuations that these stocks were trading at prior to and over the course of the administration, and not necessarily some of the policy changes that were made at that time.

I would also look at US Treasuries. I think at 4.5% they're starting to look pretty attractive here. Our U.S. economics team still believes that overall long-term Treasury yields are likely to decline for several years. I think we're looking at around 3.6% next year and probably closer to 3.0% in 2027. So I think they look attractive here. However, I would still stay away from corporate bonds. I don't think you get enough spreads on corporate bonds to really offset the additional risks.

But overall, I would just say: Don't let the dire headlines you might see here in the short term distract you from your long-term investment goals. Based on your risk tolerance, I probably wouldn't make any changes here today. And when you make changes, make sure you only make changes when there is an actual change in your underlying fundamentals, and only make changes to your portfolio based on sound analysis.

Hampton: So think long-term and stick to the game plan.

Sekera: Exactly. And as always.

Hampton: Thank you for your time today, Dave.

Sekera: Naturally. Thank you, Ivanna.