Where to put your money now that Donald Trump is president

By most accounts, we have entered a period of unprecedented change and uncertainty now that Donald Trump has taken the oath of office as the 45th president of the United States. Contrary to pre-election consensus expectations, the stock markets have advanced significantly since Election Day. Unfortunately, history shows that a post-election rally is not necessarily accompanied by solid long-term performance.

The election of Herbert Hoover in 1928 was greeted with an enthusiastic 13 percent market rise between Election Day and Inauguration Day, before the country plunged into the Great Depression only seven months later. Conversely, the S&P 500 fell by 20 percent from Election Day to Inauguration Day following Barack Obama’s first election in 2009, yet the next four years saw robust average annual gains of nearly 15 percent.

During the first week of January, The American College of Financial Services surveyed 419 Retirement Income Certified Professional (RICP) designation holders to get their opinions on the current investment climate, with a particular focus on saving for retirement. The survey respondents have all completed specialty education on retirement income planning, have earned a well-respected practitioner credential, and advise clients on appropriate financial actions to take.

{mosads}More than 50 percent of advisors reported that the election results have increased their concerns about their clients’ retirement security. Only 24 percent believe that the election has improved their outlook for their clients’ retirement security.

Forty percent of advisors were reducing risk for their retired clients by buying income annuities, valuing the certainty of guarantees even in a low interest rate environment. Half of advisors said they were rebalancing their client investment mix to lock in gains or reduce risk. In contrast, only 5 percent of advisors are encouraging their retired clients to invest more heavily in the market.

Roughly 60 percent of advisors believe that more volatility is on the horizon, even though the widely followed VIX Index—which measures expected volatility over the next 30 days—is near an all-time low.

Nearly everyone agrees that we will see higher interest rates over the near and extended future. Rates have been at unprecedented low levels since quantitative easing began during the financial crisis in 2008. The Federal Reserve increased its benchmark target federal funds rate last month and signaled three quarter-point raises for 2017. Officials further forecast three rate hikes in both 2018 and 2019.

Given this outlook, how does one invest in a Trump presidency?

In Invest With the Fed, Gerald Jensen of Creighton University, Luis Garcia-Feijoo of Florida Atlantic University and I found that stock returns were markedly higher in falling interest rate environments than in rising rate environments. When rates were falling, the S&P 500 returned 15.2 percent annually from 1966 through 2013 and only returned 5.9 percent when rates were rising over that same period. In other words, stock investors should expect lower returns during a Trump presidency—irrespective of politics and policy—because rates are likely to rise.

Not all stocks perform equally well when rates are falling or equally poorly when rates are rising. The best performing sectors in a rising rate environment are energy, consumer goods, utilities and food. Industries to avoid are autos, durable goods, retail and apparel.

If stocks are poised to underperform, some investors might consider looking to bonds. But unfortunately, the deck is stacked against good bond performance over the next several years as well because of that pesky Federal Reserve. The value of existing bonds is largely determined by mathematics and the direction of interest rates. When rates rise, the value of bonds falls.

When market rates are really low, as they are now, even very slight increases in rates can result in large drops in bond prices, particularly the prices of longer-term bonds. To illustrate, the value of a 10-year Treasury note fell by the equivalent of three year’s interest payments in just 10 days following Trump’s election, as market interest rates rose.

I believe that investors will be better served by monitoring the Federal Reserve and the direction of interest rates rather than trying to read the tea leaves in the White House. For long-term investors, that means staying the course and perhaps tilting equity portfolios toward those industries—energy, consumer goods, utilities and food—that have historically performed well in a rising interest rate environment.

Robert R. Johnson, PhD, CFA, CAIA, is president and chief executive officer of The American College of Financial Services.

The views of contributors are their own and are not the views of The Hill.