We are now in an uncertain world, and the markets are reacting accordingly. Dow futures fell 800 points overnight as the US presidential election was called for Donald Trump. But the markets quickly calmed themselves and then some; on the day after Election Day, the blue-chip index touched an all-time high of 18,648.41.
Yes, it seems clear that a Trump presidency will have implications for your retirement portfolio. But in the face of greater risks and uncertainties, often the best thing to do is nothing at all.
The outlook for stocks
Odds are some portion of your retirement portfolio is invested in the stock market. How stocks will fare over the next four years will depend on economic growth. Trump has promised a high growth rate, but how he’ll deliver it exactly is unknown. If he manages to renege on US trade deals and limit foreign trade, there will be less economic growth and the stock market won’t offer the kind of returns we are used to. If his leadership is erratic, there may also be bigger swings in stock prices.
The unusual behavior in bonds
Normally, when things look uncertain, the world turns to the safety of US Treasury bonds. The rush into fixed income pushes up prices and brings down yields. The Trump win had the opposite effect; yields on the 10-year note rose today by more than 20 basis points, to 2.06%. This might be due to Trump’s threats to default on the debt and run larger deficits.
Retirees normally move into bonds are they age and de-risk their portfolios. Trump may deliver the higher yields retirees have been waiting for, but it comes at a cost. The blip in yields could signal that the dollar is losing its status as a reserve currency. It will mean more expensive imported goods and a less stable bond market.
The future of Social Security
Another part large part of American retirement portfolio is Social Security. So far it seems Trump has no plans to alter the program—no benefit cuts or increasing the retirement age. That is great for near-retirees, but it leaves the program unable to finance full benefits in 2034. Ignoring the problem now means future retirees continue to be uncertain about the prognosis for the program and the possibility of benefit cuts in the future.
So what to do with your portfolio
No doubt about it, starting today the world is on less certain terrain. But that doesn’t mean there’s much you can, our should, do with your 401(k). If you are decades away from retirement, the next four years may not have much impact on our portfolio (assuming there’s not a total reset of all trade relationships). If you are closer to retirement, the normal safe asset is bonds, but if yields rise over the next few years, the value of your portfolio will fall. All you can do is have faith that institutions can survive uncertainty and that your retirement portfolio will too.