Investors bet Trump stimulus will boost U.S. stocks

By David Randall and Jonathan Stempel

NEW YORK (Reuters) - U.S. voters' decision to install Donald Trump in the White House may extend the life of the aging, seven-year bull market in U.S. stocks.

That is the consensus of prominent investors attending this week's Reuters Global Investment Outlook Summit.

Expectations that Trump will successfully engineer massive new infrastructure spending, slash corporate and some personal income taxes, and wipe out a slew of regulations may boost prospects for U.S. stocks, and end what some investors call a three-decade bull market in bonds.

"The earnings impact of President-elect Trump will outweigh whatever increase in bond interest rates comes about," said Steven Einhorn, vice chairman of hedge fund Omega Advisors Inc, which invests about $4 billion.

Einhorn expects U.S. stocks to return as much as 8 percent in 2017, including dividends. "The risks are to the upside for the (Standard & Poor's 500) rather than the downside," he said.

As the post-election, double-digit percentage surge in bank stock prices suggests, investors expect Trump to bolster that sector by reducing its regulatory burdens.

They also said infrastructure spending could boost old-line sectors such as coal and steel.

"I do think that Donald will do an excellent job," said Carl Icahn, the billionaire activist investor and one of Trump's earliest Wall Street supporters.

But even Icahn, who left what became Trump's victory party in the early morning on Nov. 9 to make a nearly $1 billion stock bet, expressed near-term caution about stock markets, citing concern about the overall economy.

"It has run ahead of itself," he said. "There are going to be bumps along the road. You know, this is a big ship that you've got to really turn around. You've got to get this economy back on track, and I don't think it is."

ONE-NIGHT STAND?

Investors are betting that will change and poured a net $23.6 billion into U.S. stock funds in the latest week, according to Lipper data.

Such enthusiasm may in part reflect investors' bad habit of chasing recent performance.

Or, it may reflect their desire for a longer-term commitment to stocks.

"The first question is whether they've actually fallen in love, or whether it's sort of a one-night stand," said Richard Bernstein, chief executive of Richard Bernstein Advisors LLC in New York. "Right now it's more of a one-night stand... You haven't seen the lasting shifts in asset allocation."

Bruce Richards, chief executive of hedge fund Marathon Asset Management, which invests $13 billion, said Trump's victory could boost gross domestic product growth by 1 percentage point, and has made him bullish on "the whole steel complex."

The Republican sweep of Congress may also bode well.

"I don't think the market would have done this with a split Congress," said Jason Karp, who runs the $3.8 billion hedge fund Tourbillon Capital Partners LP in New York. He said financial stocks could rise 50 percent more, despite their recent gains.

But Dawn Fitzpatrick, global head of equities, multi-asset and the O'Connor hedge fund businesses at UBS Asset Management, said there could be a near-term pullback, especially if more regulations survive than some hope.

Several guests also questioned how thoroughly Trump would, or would want to, follow through on his tough-on-trade rhetoric.

"You're going to hurt 70 percent of the economy" with big new trade barriers, Bernstein said. "Do you really want to pay $1,000 for your big screen TV instead of $250? I don't think you're going to find too many people who want to do that."

BACKING OFF BONDS

Many summit attendees said investors need to take a fresh look at how bonds fit into their portfolios, and to steel themselves for possible losses in 2017.

"We have a set of investors that has been trained to buy bonds for capital appreciation, and buy equities based on yield," Fitzpatrick said. "That behavior is going to have to be unlearned."

Higher yields, and lower prices, are likely for many bond classes, ranging from U.S. Treasuries to junk bonds.

Some of that has already occurred, with the yield on the benchmark 10-year U.S. Treasury note surging above 2.3 percent from 1.86 percent on Nov. 8, and below 1.4 percent in July.

Kathleen Gaffney, who helps run investment-grade fixed income at Eaton Vance Management in Boston, which oversees $343 billion, said she is holding an above-average 11 percent cash stake to guard against volatility.

Josh Brown, chief executive of Ritholtz Wealth Management in New York, said investors should focus on building "durable" portfolios to ride out whatever happens.

"Behavior is going to be more determinative of our clients' returns," he said. "We can't control the markets, we can't control what the Fed's going to do, we can't control who's elected, but we can control our responses."

(Additional reporting by Lawrence Delevingne, Sam Forgione, Svea Herbst-Bayliss and Trevor Hunnicutt; Editing by Jennifer Ablan, Bernard Orr)

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