Trump has the stock market confused — but investors don't have to be

To some, the stock market seems like a casino. Put some money in, and take a gamble to see if your investments moon or go to zero. But that's not the reality for a large part of the investment world: For those who primarily engage in buy-and-hold, diversified investing — such as pension funds and mutual funds — the market is generally seen as a reliable way to grow long-term wealth. 

Sure, there may be some bumps along the way, such as when unexpected events like geopolitical conflicts or natural disasters cause investors to rush for the exits. There can even be prolonged downturns, like when the economy shrinks. But in general, these are detours, not roadblocks. On average, the S&P 500 has returned roughly 10% per year over the long term, even accounting for events like the Great Recession. That's not to say that each particular year is likely to see 10% stock market gains, nor will past returns necessarily continue in the future, but in general, most experts agree that the stock market can reasonably be expected to trend upward in the long run. 

So what happens when a variable like Donald Trump enters the equation? Markets crave consistency, while Trump thrives on impulse — a recipe for a roller-coaster investment ride. And his policies on everything from tariffs and immigrants to tax cuts and cryptocurrency may or may not affect how bumpy the ride will be. 

"The markets don't like to be surprised," said Mark Malek, chief investment officer at Siebert.NXT, a registered investment adviser. However, Trump "seems like he's a fan of generating uncertainty, which I guess he uses as a position of power, for negotiation, etc."

Should that change investors' outlooks and actions? The answer depends somewhat on your situation and risk tolerance, but in general, experts advise investors to be aware of potential ups and downs but not act too rashly.

Ultimately, Trump's embrace of uncertainty could spell more market volatility in the coming years, but investors don't necessarily have to respond to the uncertainty. Professional investors might react more, as their job may be to try to outperform market indexes, for example, but the average individual might be best served by continuing to buy and hold, rather than overtrading.

Signal in the noise

Rapid executive orders and the president's willingness to announce his policies on social media or in off-the-cuff remarks have already shown the ability to move markets. Trump's on-and-off tariffs have caused markets to whipsaw this year. Those who sold assets due to tariff fears and didn't quickly buy back in may have missed significant gains when the S&P 500 hit all-time highs later.

In other words, if you made investments based on those initial tariffs on imports from Mexico and Canada that Trump later reversed, "you most likely are regretting it," said Malek.

To avoid this, investors might consider being more patient regarding what information they act on.

"There's an old Wall Street adage of finding the signal in the noise, but never has it been more important than right now," said Malek. "Whether you're an institutional investor, or you're a retail investor, right now you're trying to understand what is signal and what is noise. And there has been a lot of noise."

Given Trump's impulsive approach, it could pay to wait for the signals to be more definitive, not speculative.

"I think the name of the game is that you're better off in this case to react rather than be proactive, and wait to see what those policies are actually going to be," said Malek.

While some investors might decide to take steps like moving into different asset classes or sectors if certain policies are enacted, it can still be very hard to predict what will happen and how markets will respond. 

So, another adage of focusing on "time in the market" rather than "timing the market" could also be key in this environment. Whatever investment strategy you've set for yourself might be best left untouched, even if volatility swirls around you.

"I think staying the course is typically a good response. I would be hesitant to swing one’s asset allocation much on such news or to fundamentally reduce volatility, as I would recognize that it would be difficult to predict the changing nature of fundamentals," said Chester Spatt, professor of finance at Carnegie Mellon University's Tepper School of Business.

How policy changes could affect investments

While staying the course could make sense for many, that's not to say that it always makes sense to do so. Those with a higher risk tolerance and who engage in active trading, for example, might be willing to adjust their portfolios to try to take advantage of policy changes that could help or hinder some sectors or particular companies.

For one, financials could perform well over the next couple quarters, suggested Malek, due to factors such as a potentially higher volume of investment banking transactions and trading that generates fees for these companies. Plus, financials are relatively insulated from tariffs, he said.

However, some other sectors like consumer discretionary and consumer staples could face some challenges from tariffs, although within these sectors there are particular companies that will still do well, said Malek. 

"You have to look at every company individually these days," he said. 

Moreover, the way Malek's company analyzes individual stocks has changed recently. For example, "we have more heavily weighted supply chain factors," due to the impact that policies like tariffs against China could have.

Some policy changes, while significant on a political level, could be less disruptive to markets, such as if Congress extends tax cuts set to expire this year.

"Many of the tax changes would not necessarily be very stimulative now, since they already have prevailed since 2017," said Spatt.

However, Trump's approach to other policies, such as antitrust enforcement or digital assets, could potentially impact markets, he said.

The challenge, as in any environment, is jumping on these trends before these changes get fully priced in due to other investors responding. Yet investors want to be careful about acting on policy noise that does not come to fruition, so it's hard to get in at a good time. That ties back to the value of staying the course, rather than taking the risk of trying to figure out what will happen next.