In the four weeks since Donald J. Trump was elected president, many stocks have soared and the market’s winners have been clustered around a specific theme: an inflating economy.
Investors have concluded that at least in the short run, many of Mr. Trump’s policies, including increased spending on infrastructure projects, could lead to faster economic growth than was expected.
“If you have big tax cuts and more infrastructure and defense spending, that adds to demand, which is likely to spell inflation,” said David Kelly, chief global strategist for J.P. Morgan Funds.
That is partly why shares of big banks like Goldman Sachs, Bank of Americaand J.P. Morgan Chase and blue-chip industrial companies like Caterpillarand General Dynamics have surged since election night.
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But after more than a month of this rally, value-minded investors think it may be time to start looking for bargains in areas of the market that have been left behind.
“The biggest opportunity is in the international markets,” said James Paulsen, chief investment strategist at Wells Capital Management. “Those stocks are getting pounded by one big factor — the dollar.”
A strong dollar not only reduces the value of gains that Americans enjoy on their overseas investments, but it also serves as a headwind to domestic companies as a strengthening currency makes their goods more expensive to foreign buyers.
In the immediate aftermath of the election, the dollar surged as much as 4 percent against a basket of foreign currencies, on the belief that market interest rates in the United States would keep rising and the Federal Reserve would start lifting short-term rates, too. Both moves would provide greater incentives for global investors to park their cash in dollar-denominated assets.
But Mr. Paulsen looked at the start of the last five periods in which the Federal Reserve began a sustained campaign to raise short-term rates. “Every one of those times was associated with a decline in the dollar,” he said, not a rise.
While it’s true that rising bond yields can strengthen the dollar, rates are often raised to stave off inflation, and that can hurt a currency. If the Federal Reserve starts hiking rates this month because it sees a need to quell inflation, that could weaken the dollar, Mr. Paulsen said.
“If the dollar comes down,” he said, “that definitely brings the foreign markets, particularly the emerging markets, into play.”
Lewis J. Altfest, chief investment officer for Altfest Personal Wealth Management, concurs with this logic and is adding to his investments in emerging market equities, he said, especially after they’ve taken another hit. Since the Nov. 8 election, emerging market shares such as the Chinese internet giant Tencent have fallen, while a broad range of shares in the American market have gained.
Historically, emerging market stocks have traded at roughly a 15 percent discount to United States shares based on price/earnings ratios that rely on five years of averaged profits, according to figures compiled by the Leuthold Group.
Today, that has widened to a near 50 percent discount.
Emerging market stocks weren’t the only investments that had taken a hit because of rising interest rates lately.
In the aftermath of the election, the yield on 10-year Treasuries jumped to 2.4 percent, while 30-year Treasury yields rose to 3.1 percent. Both are up a full percentage point from their levels this summer, which helps to explain why the average long-term government bond mutual fund fell more than 7 percent in the month after the election.
Part of this slump in bonds stems from inflation fears, but some of it was also an outgrowth of comments by Steven Mnuchin, Mr. Trump’s nominee for Treasury secretary, that to lock in today’s low rates, he would be open to the government issuing ultralong bonds, with maturities of 50 and even 100 years. That could signal a big rise in government debt levels, which would tend to raise bond yields and lower prices, which move in the opposite direction.
In any case, bond investors may have overreacted in selling.
“It comes down to the question of timing,” said Kathy A. Jones, chief fixed-income strategist at the Schwab Center for Financial Research. While $1 trillion of infrastructure would be inflationary, “every policy analyst I’ve talked to emphasizes how long it takes to implement these types of infrastructure projects.”
The same goes for Mr. Mnuchin’s speculation about new longer-dated bonds. It could take years for the Treasury to actually issue such bonds, Ms. Jones said, and as that realization takes hold and selling slows down, there may be some short-term opportunities in Treasuries, she added.
Investors may want to consider sectors that have underperformed during this postelection surge, even if they haven’t declined.
Take technology. American tech stocks haven’t moved much since election night.
Why? Conventional wisdom said that the new president’s views on immigration and trade would hurt tech companies the most, in part because these firms generate a greater portion of their sales overseas — 58 percent — than any other sector of the market, according to FactSet, a financial research firm.
But Jack A. Ablin, chief investment officer for BMO Private Bank, said the Trump administration’s incipient economic goals appear to be threefold. “The first is to grow the economic pie, and then to widen the slices of both wages for workers and profits for companies,” he said.
To accomplish that, the economy would need to increase productivity. “Ultimately, business investment has to be part of the solution, and because of that, tech will be critical,” Mr. Ablin added.
This may not directly help consumer-focused companies like Apple, “but this should be good news to tech companies that sell to other businesses, like Salesforce.com,” Mr. Ablin said.
Health care is another fertile area to consider, market strategists say. While big pharmaceutical companies rallied immediately after the election — on the assumption that a Trump administration will relax regulations — other parts of the sector have been largely flat on uncertainties surrounding the potential repeal of the Affordable Care Act. Medical equipment stocks, for instance, have slumped on fears that if Obamacare is eliminated and fewer Americans are insured, hospitals will purchase less new equipment.
“Health care is an interesting area postelection because there is still so much uncertainty about Obamacare,” said Mary L. Pierson, co-manager of Fairpointe Capital’s mid-cap stock strategy.
Yet Ms. Pierson noted that some equipment makers are likely to grow with or without Obamacare, citing Varian Medical Systems, an equipment manufacturer based in Palo Alto, Calif., that makes devices for radiotherapy used in treating various forms of cancer. The company generates more than 50 percent of its revenues overseas. What’s more, nearly 95 percent of all radiotherapy equipment installations over the next decade are expected to be handled by just two firms — Varian and its rival, Elekta.
Ms. Pierson sees Varian’s mediocre postelection performance as “an opportunity for us to add to our position.”
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