Well, it is over whether one likes the end result or not! From our team’s vantage point, we have to separate personal political preferences from our work at hand. So what effect will a Trump presidency have on the global economy and financial markets? Is the recent strength in economically sensitive stocks a sign of more good news to come – or simply a “head fake” before bigger trouble lurking ahead? We’ve got some thoughts for you.
First and foremost, we want to reiterate what we wrote just weeks ago: “It is important that investors remind themselves that stock and bond markets are essentially driven by corporate earnings and Federal Reserve policy…Once the votes are tallied, stock and bond markets will go back to their business of focusing on their primary drivers…in that light we see more positive than negative for investors.”
Prior to the election results, we were concerned about the lack of visibility of Trump policy – rightly so since it was vague to say the least. However, over the past week, a few things are becoming apparent. Trump, the man, seems to have found a slight degree of humility in the gravity and seriousness of his victory – this is a positive sign. He has also very quickly backed away from some of his most adamant and aggressive promises, such as a complete dismantling of Obamacare and having a more open ear to moderating international trade. It’s still early, but it seems that his “bark may be worse than his bite” in the end. There is little question that Trump is moving very quickly to create significant pro-economic growth incentives to jump start the economy. Trump’s selection of Chief of Staff Reince Priebus and strategist Steve Bannon are signs that he is going to bring experienced “heavy hitters” and that he may govern more conventionally than his campaign suggested. His search for a pro-growth Treasury secretary from either Goldman Sachs or JP Morgan means good news for pro-economic growth fans. Is he likeable? Not to most people. Do financial markets care if he’s a nice guy? No. This takes us to pro-economic policy and its effect on financial markets.
After a corporate profits recession that lasted more than a year during 2015-2016, we have witnessed a turn for the better across some of the most important sectors and industries that drive longer term economic growth. This includes technology, materials, industrial and energy companies. As we mentioned pre-election, these sectors continue to recover, and can easily drive economic growth rates and support higher stock prices. Interestingly, it is in these areas of the market where stock prices have risen the most post-election, hence our continued optimistic view. Trump’s victory has only further validated this position. The last time corporate profits began a recovery while at the same time a pro-growth Republican president was in office was 1983 – Ronald Reagan. Obviously, Trump is no Reagan. However, the analogy of an earnings recovery coinciding with a pro-growth president is important. 1983 was the beginning of a historic bull market in stocks that lasted years and that investors would not have wanted to miss! We think this outcome is a possibility as we enter 2017.
There is little doubt, given an earnings and profit recovery, that The Fed will raise rates as we move forward. Be not afraid of The Fed! Rate hikes will come with lots of language that will support higher stock prices such as, “given the strong earnings and economic outlook we feel it is prudent to raise rates.” Historically, initial Fed rate hikes combined with this type of language has been “music to the market’s ears” and can drive stocks higher quickly.
As you may have noticed, we have changed your portfolio significantly since the earnings recovery started in the summer – from a defensive posture that effectively protected your portfolio during the huge volatility that occurred throughout 2015 and the first half of 2016 – to one that is now more growth oriented. Though we missed the very first part of the rotation to growth in the third quarter, we are now firmly positioned to take advantage of further upside. Our addition of financial, material and industrial stocks in the past quarter have far outperformed market indexes and we continue to believe that your portfolio structure is poised for a successful 2017.
As you know, we have a very flexible approach to our work. Should our analysis of this current environment prove incorrect, we are prepared to become more defensive through your asset allocation, sector management and the use of carefully placed stop loss orders.
If you have any questions or thoughts or have experienced any significant changes in your financial circumstances, please let us know. Thanks again from all of us for your continued vote of confidence. If you have any friends or colleagues who you feel may benefit from our services, we would be happy to introduce ourselves to them with a no-obligation introductory meeting.
– Your Team at Main Street Research