Investors should prepare for the end of the markets’ love affair with Trump

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What do you do when you're worried about Donald Trump but you can't help but notice that the stock market seems to like him?

Canadian and U.S. stocks have been resilient since Mr. Trump's surprising victory in the U.S. presidential election last week.

The Dow Jones industrial average has been exploring new highs, while Canada's S&P/TSX composite index remains one of the world's strongest performers this year.

The bond market, too, is sending upbeat signals: Yields are rising to reflect the prospect of stronger economic activity ahead. Meanwhile, gold and the CBOE volatility index – both decent gauges of investor anxiety – have returned to a peaceful slumber.

Clearly, markets are warming to many of Mr. Trump's campaign promises, by embracing the impact of lower financial and environmental regulations. But joining the rally means you probably have to stay nimble.

Indeed, the recent gains underscore the idea that the stock market is taking a notoriously short-term view of things, ignoring what some observers believe is a far less certain economic future.

Even Paul Krugman, the economist and New York Times columnist – and, yes, vocal Trump critic – agrees that things could go okay in the near-term.

"There is always a disconnect between what is good for society, or even the economy, in the long run, and what is good for economic performance over the next few quarters," Mr. Krugman said in a recent column. "Trumpism will have dire effects, but they will take time to become manifest."

He wouldn't be surprised if U.S. economic growth accelerates over the first half of Mr. Trump's presidential term – and again, this comes from someone who really dislikes the incoming president. For example, he pointed out that failing to act on global warming won't hurt consumer spending in the near term and increased protectionism won't cause an immediate recession if imports and exports both decline. As well, tax cuts for the rich, while inefficient, will provide some economic stimulus.

"In short, don't expect an immediate Trump slump," Mr. Krugman said. Longer-term, though, he believes Mr. Trump's policies will prove disastrous in dealing with an environmental or economic crisis.

While you can downplay Mr. Krugman's longer-term concerns as an ideological response to Mr. Trump, a number of other high-profile voices have been similarly cautious about the economic impact of the next president.

Among them is Janus Capital's Bill Gross, one of the world's most authoritative voices on the bond market – who says he did not vote either Democrat or Republican in last week's election.

Mr. Gross believes that tax cuts may in fact weigh on U.S. economic activity, given that companies are unlikely to use the savings to finance U.S. expansion plans while the government surrenders revenue. As well, Mr. Gross argued that lower taxes translate into higher deficits, inflation and interest rates, which will hurt corporate profits and stock valuations.

"Investors must drive with caution," he warned in a note on Wednesday. "There is no new Trump bull market in the offing."

So where does that leave investors?

If you're feeling nimble, you can ride the current trends, which have rewarded sectors that stand to benefit from rising interest rates, decreasing regulations and renewed economic activity in the near-term.

Since Mr. Trump's victory, financials and industrials have stood out, primarily among U.S. stocks but also Canadian stocks too. Banks, insurers, engineering firms and defence companies fit well Mr. Trump's plans.

The longer-term bet, which also looks safer, rests on buying stocks that haven't responded well to Mr. Trump's victory. Since last week, utilities and consumer staples on both sides of the border have fallen sharply, as investors flee economically defensive, dividend-generating stocks.

These cast-offs – ranging from Philip Morris International Inc. to Coca-Cola Co to Consolidated-Edison Inc. – aren't exactly bargains yet, but they're certainly worth considering if they continue to fall out of favour.

The best part: In buying them, you don't have to embrace Donald Trump's presidency.