Trump and the Death of Experts
Based on the election results last night and the reality that the whole country is absorbing, I decided to send this week’s commentary a little early this week as there is a lot that I figure many of you are waiting to read. Are we shocked that Donald Trump won the Presidency? Of course we are. Everyone is. Our focus here is on the investment implications of this whole thing, not the purely political or national concerns. So as market enthusiasts who deeply love our country, here we go…
Lesson #1: The Death of Experts
It really is a fatal blow to pollsters, pundits, and the prognosticator class. It isn’t like there was one or two polls who slightly got it wrong; this was a systemic A-Z disaster for pollsters and the like, and I am not sure how that industry can ever recover. I do not believe there was a conspiracy, a thumb on the scales, or anything nefarious – I just think it was a case of systemically wrong models and over-confidence in the inputs that were determining the outputs. Maybe there is a lesson here in those who rely on mathematical models to make very important decisions??? (Yes, Fed, I am talking to you) =)
Cats and Dogs Falling from the Sky? Not quite
The market is presently up 150 points (that can change at any time) despite last night showing an 800 point drop at one point. And the market is UP 600 points on the week as of press time. You wouldn’t quite get that impression from media coverage, but these are the facts! Things can change, and this is a highly selective rally – certain sectors are doing best based on expected ramifications – but my point is that the entire idea of “panicking” – “hiding in cash” – “getting out of the way then coming back” – are just so insanely dangerous, we exist to help people avoid those
The Fed, the Fed, and Nothing But the Fed
The question that I will wrestle with for quite some time is this: Does the Trump win make the Fed MORE likely to act aggressively in 2017 (blame a tightening-driven recession on him), LESS likely to act (out of enhanced fear of overall economic volatility), or are they really totally and completely apolitical? Bahnsen Group answer: We don’t know. But if we wanted to be concerned for market volatility with the Trump win, THIS is the point we would focus on!
Energy Renaissance Has Us Happy
If there is an area that I think ought to benefit the most from these election results, it is the energy infrastructure sector. There is a federal government control over much of this world that is particular to the executive branch, and the articulated commitments from the executive branch and legislative branch in this space are hugely bullish. Execution will matter. Timing will matter. Other economic and commodity price issues will matter. But all things considered, we believe the most growth-oriented catalyst this economy has will tremendously benefit.
The headlines are in DC; the stock prices may be in Sacramento
Nothing is more shocking to us (and I dare say, pleasantly shocked, than the failure – the overwhelming failure – of Proposition 61) – the California initiative that attempted to set price fixing rules on the drug industry (and would have served as a significant precedent for other states and even the federal government) … Drug stocks, biotech, etc. are all flying today thus far as this embedded risk comes out of many stock prices.
So Energy and Pharma. And ????
Trump campaigned on a 15% increase in defense spending. The defense and aerospace stocks are flying too today. This is another area where I believe market response is justified. The sequester has compressed defense spending a great deal and we have significant foreign policy conflicts that require modernizing. NATO treaties require many allies to increase their spending. I believe we will see improvements here and greater opportunities in defense stock names. The other space is financials where many pundits were concerned that Hillary Clinton was being forced to run very close to the Elizabeth Warren wing of the Democratic party, and therefore may carry a sort of anti-financials agenda into office. That hypothetical concern is now moot and financials are rallying hard. We like certain names in this sector on their own merits, but would caution investors that President-elect Trump also campaigned on an anti-Wall Street rhetoric that may provoke him to earn those populist bona fides.
Keeping me up at night
We are basically laying out the case from a market standpoint that certain sectors like what they expect from this new administration (energy, pharma), and that we do have a curiosity about what the Fed will do in light a Trump Presidency. But if we were to say what concerns us the most from an economic and market standpoint, it is the protectionism that Trump campaigned on. We do not know what the bite of his anti-trade policy will be relative to the bark of his anti-free trade rhetoric. And we do not know how the Senate and House will interact with him on this (the same political party, but a different ideology on this issue). We are watching who he appoints as the U.S. Trade Representative. An isolationist/protectionist/nationalism will have a different effect on markets than a mere rhetoric. We are not wearing rose-colored glasses.
Playing in the sandbox
Because the Republicans kept a strong majority control of the U.S. Senate and of course the House of Representatives, the traditional need of “reaching across the aisle” is not necessarily the posture this new administration faces. However, within his own party, the dynamic between a President Trump and a Speaker Ryan will have profound effects not merely on the political climate in our country, but on market impressions of what will get done and not done. If an intra-party Civil War is exacerbated, that could create ongoing volatility.
Lesson from the futures market
Many of you emailed us overnight expressing understandable concerns about what you were seeing on the news and hearing (regarding the futures market). With Brexit, we dropped 500 overnight, ended down 900 after two days, and then rallied over 1,000 points in a week or so. With this situation, we didn’t even make it to the market open until the nano-second of insanity ended. The lesson: Please understand it is a permanent reality that panic and drama are terrible ingredients in investment policy.
Bonds Trump Ballots
The biggest factor driving equity valuations for the rest of the year will be bond yields, which essentially will set the multiple for how stocks are valued. A 10-year treasury yield closer to 2% will mean a sharp reduction in valuation for the S&P; the 1.8% yield we see now is reasonably priced in; a 1.6% yield would likely mean an equity rally – probably new all time highs. It is not about the “E” right now (earnings) it is about the P (price) to E (earnings) – the multiple. And the bond yield is holding that multiple in check.
Sell disciplines don’t change just because the drinking water changes
We get asked a lot when it is the right time for our emerging markets guys to sell stocks they own. Let’s start with what doesn’t drive our sell methodology: quarter-over-quarter blips, and event-driven noise. We believe a stock should be sold when the fundamentals of their business have deteriorated, or when the intrinsic value of a company becomes reflected in the stock price, or when the underlying investment thesis itself is fundamentally altered.
Brexit? What Brexit?
To refresh your memory, The Bahnsen Group’s opinion on the British exit from the European Union has been from day one: (1) It was the right thing for Britain and its citizens (we believe we are right about that and there will be continued validation of this for decades); (2) It was unlikely to pass (we were wrong about that); (3) The panic around it would be short-lived (we were very right about that); (4) Ultimately this will prove good for the EU too if it leads to it reforming or breaking up (we believe time will validate this too); and (5) The devil will be in details of execution, etc. The court’s ruling last week that Parliament themselves would have to trigger the Article 50 departure from the EU and not merely the Prime Minister is fascinating. That decision is now on appeal to their Supreme Court for a December decision. Could Parliament actually deny the will of the voters in that non-binding referendum? Wow. My sources in the British legal community tell me they believe the Supreme Court will not overturn this ruling, but that Parliament will absolutely go forward triggering Article 50 (meaning, Brexit will go on as planned). Volatility is expected as all these things sort out. And greater freedom will be the result when all is said and done. And once again, I repeat, where has greater freedom EVER not been good for markets?
Chart of the Week
I was determined to have our Chart of the Week this week have nothing to do with the election or politics. The reality is that this chart actually has a lot more to do with the market and the global economy than anything political does. In August of 2015 and again in January of 2016 we saw a significant shock to markets as Chinese foreign exchange reserves suffered a huge and unexpected drop, panicking markets about Chinese currency depreciation and the overall state of global growth. Now, a year later, we see two different things happening at once: Iron Ore and Copper indicating there is a strengthening situation in China; but their reserves continuing to decline (albeit at a more measured and deliberate pace). Money continues to flow out of China, and the way they have threaded this needle so far may not last for long.
Quote of the Week
“I have given up all hope of a better past.”
– Nehama Benmosche
Originally published on the Bahnsen Viewpoint.
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