Expect Lower Returns in a Trump Presidency

Kate Moore is chief equity strategist at BlackRock, the world’s largest money manager, with $5.1 trillion under management. Here's an excerpt from our interview:

KIPLINGER’S: What impact will a Trump presidency have on the market?

MOORE: In the short term, we expect higher market volatility and policy uncertainty. As President Trump lays out his policy priorities, markets will have more clarity. We believe the U.S. economy is fundamentally in good shape and that as president, Trump will be committed to further improving growth.

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What kind of returns can stock investors expect? Looking out over three to five years, our return expectations are meaningfully lower than they have been. For a global portfolio of stocks, we’re looking at 4% to 6% annualized returns, including dividends. That’s an average—returns might be slightly higher in 2017 and 2018, but then you get to a slowdown. Investors are going to have to adjust their expectations downward.

Why such modest expectations? Share-price gains will have to be driven less by support from central banks and more by improvements in corporate fundamentals. That’s not to say monetary policy will tighten. And given the likely focus of the new administration, I do expect some fiscal stimulus from increased government spending. But that might not be as potent as the monetary stimulus we’ve had since the financial crisis.

Wait. Don’t you expect the Federal Reserve to tighten by raising short-term interest rates? You have to distinguish between normalization and tightening. We see the Fed raising rates one or two times in 2017. I’d argue that’s normalizing policy, not actually tightening to slow down the economy. Whether you’re looking at corporate debt or consumer balance sheets, a couple of quarter-point increases shouldn’t have a negative impact.

What corporate fundamentals need to come through to drive stock returns higher? The most important is a broad improvement in sales growth. If you exclude energy and other resources companies, corporate earnings have been okay, if not terribly inspiring. Companies have done fine, maintaining profit margins by continuing to cut costs. But executives have been extremely risk-averse, reluctant to make big investments or add to ongoing expenses. To have significant earnings improvement, you need a real reduction in uncertainty about the future and a willingness to take risk. I’m talking about companies investing in themselves, investing in their people and engaging in more growth-productive deals. Until that happens, the stock market is not likely to accelerate.

Where should investors put their money? You need a global portfolio to earn that 4% to 6% return, not just, as so many U.S. investors like to have, a portfolio filled with large U.S. companies. We see long-term opportunities in emerging markets, particularly in Asia, but recognize that major changes in trade policy could pose a challenge for these markets. We are not as constructive on Europe. European banks need to go through the overhaul that U.S. banks went through in recent years. Additionally, the political risks that the Continent faces in 2017 make us cautious. Stocks in Europe aren’t cheap, either. We’re neutral on Japan. Valuations look fair, but Japan faces many challenges in terms of economic and earnings growth. Our preference within developed markets is, without question, the U.S.

What do you favor in the U.S.? We’re big fans of large-company stocks to produce income. Given low interest rates for the foreseeable future, that income will be important. We prefer companies with growing dividends to those with high dividend yields. Companies that can increase dividends have higher growth prospects in general. We also look for stocks in sectors with strong long-term demand trends in place—technology and health care both qualify. Health care stocks are undervalued, reflecting political concerns. But it’s a sector with strong earnings and revenue growth, and there’s little question that demand for its services and products will expand. The tech sector is not all that cheap, but it has solid long-term earnings prospects. Financials are interesting. Unlike their European counterparts, U.S. banks are in good shape, well positioned to take advantage of modestly higher interest rates.