By Paul R. La Monica

The market needs to prepare for a second Donald Trump stint in the White House. Fortunately, much of the playbook from his first term can serve as a guideline for what might come next for stocks and bonds. Here are four ways that investors might want to consider positioning their portfolios.

Bank Boost

Financial stocks soared Wednesday on the news of Trump's victory over Vice President Kamala Harris. Goldman Sachs Group was a leader in the Dow Jones Industrial Average, with its stock hitting a record high. So did shares of the bank's Wall Street rival Morgan Stanley. Shares of other megabank stocks, such as JPMorgan Chase, Wells Fargo, and Bank of New York Mellon notched fresh all-time highs as well.

Financials should benefit from a push toward lower short-term interest rates, even as long-term bond yields spike. That could boost demand for loans and make lending more profitable -- a plus for smaller banks. As such, the SPDR S&P Regional Banking exchange-traded fund soared more than 10% Wednesday.

Investors may also be betting that Trump's win could lead to fewer regulations on financials and a more relaxed antitrust regime. Wells Fargo, in particular, could get a lift if regulators remove the asset cap limit that was imposed upon the bank following its fake account scandal from several years ago.

That would likely boost merger and acquisition activity, providing a healthy boost in fees for the nation's largest banks. Valuations for banks remain relatively attractive, too. The Financial Select Sector SPDR ETF trades for about 16 times 2025 earnings estimates. Regional banks are even cheaper, at a price/earnings ratio of just 12 times next year's profit forecasts.

Chris McGratty, a managing director at KBW, said he expects multiples for the regional banks to expand, partly due to the prospect for deregulation and more mergers in the sector.

Value on Sale

Financials are just one so-called value-oriented sector that could do better under a Trump presidency. A domestic focus also could be good for other cyclical sectors, which are trading at lower P/E ratios than many of the Magnificent Seven momentum darlings in tech and communications services.

The iShares S&P Value exchange-traded fund has an overweight position in financial stocks -- plus big stakes in healthcare, industrials, and consumer-staples companies -- and trades for 16 times 2025 earnings estimates. The iShares S&P Growth ETF, meanwhile has a P/E of 27, well above its five-year average of 23. This gap should narrow as profit momentum picks up for value stocks.

"We expect cyclical leadership to continue in the coming months as the market anticipates stronger economic growth and better earnings," said Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in a report Wednesday morning.

Insurer UnitedHealth Group was one of the top stocks in the Dow on Wednesday, with investors betting that the Trump administration will focus on Medicare Advantage plans and possibly pare back the Affordable Care Act. Construction giant Caterpillar was another Dow winner following the election. Steel stocks Nucor and Steel Dynamics were leaders in the S&P 500 index, with each surging more than 10%.

Small Is Still Beautiful

Stocks with mega market capitalizations may have dominated the market for the past few years, but it may be time for investors to think a little smaller. The Russell 2000 and S&P Small Cap 600 indexes both surged more than 5% Wednesday in the wake of Trump's win.

Smaller stocks should benefit from protectionist trade policies, such as the ones that Trump enacted in his first term. Think more tariffs against China -- and potentially ones against economic allies such as Europe, Japan, Canada, and Mexico. Trump will clearly be pushing an America-first economic agenda. That, in addition to lower taxes for businesses, could boost small-cap stocks.

"The small-cap rally is a reflection that they are more domestic oriented and could get more of a pure benefit from protectionism. A corporate tax cut may also help small-caps more directly," said Tom Graff, chief investment officer of Facet, a financial planning firm.

Small-caps still look reasonably attractive. The S&P Small Cap 600 trades at about 15 times 2025 earnings forecasts, roughly in line with its five-year average and a slightly larger discount to the S&P 500 than usual.

"Small-caps are waiting to break out," said Ray Baraldi, senior financial advisor at 213 Strategic Partners. "Trump prevailing could lead to some emergence there because of the focus on their domestic business."

A Bond Bonanza?

Investors will need to be careful in fixed income, though. The yield on the 10-year Treasury Tuesday night and Wednesday as investors digested the fact that a Trump win -- and possible red sweep in both chambers of Congress -- could bring back inflation concerns.

"The 10-year definitely needs to be watched," said Jim Lebenthal, partner and chief equity strategist at Cerity Partners. He said that if the 10-year Treasury's yield, which is hovering around 4.4%, cracks the 4.5% threshold, investors may start to worry more seriously about how high long-term yields could go.

With that in mind, investors should probably look more to shorter-duration government bonds. The iShares 1-3 Year Treasury Bond ETF was flat Wednesday, while the iShares 20+ Year Treasury Bond ETF tumbled 3%.

Bond investors may also want to go down the credit spectrum, in addition to seeking out shorter-duration assets. The iShares iBoxx $ High Yield Corporate Bond ETF was up slightly Wednesday, while the iShares iBoxx $ Investment Grade Corporate Bond ETF fell about 1%.

The explosive stock market rally Wednesday following Trump's win is a definitive sign that the risk-on trade is back in vogue. That means junk bonds could continue to outperform investment-grade debt.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 06, 2024 13:55 ET (18:55 GMT)

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