Trumped! Crouch Connection, November 2016
As we watched the returns come in on election night, the first hint that Donald Trump might upset the universal predictions of a Clinton sweep were called into question by the early Florida results. Trump was neck and neck with Clinton in the urban east coast cities where she should have been leading convincingly. As the news throughout the night began to indicate a Trump victory, the market futures began to dive, exactly as predicted.
As I commented in the last “Crouch Connection” that we might get a “big sigh of relief” after the election, before the market opened Wednesday morning it began to recover, and the market staged an impressive rally the rest of the week! Trump’s pro-growth policies are getting credit for the rally, but I believe the market is celebrating the unprecedented negative campaign is finally over!
Tremendous uncertainty has now been removed from our lives, our nation, our economy and our markets. We now know WHO will be President, WHAT the priorities of the president-elect might be and the MAKEUP of the Congress that will be debating those new policies. Gridlock may be a thing of the past.
WHAT CHANGES AND WHAT DOES IT MEAN?
A Trump presidency, of course, means that things will most likely change in Washington that will probably impact the markets in potentially significant ways. It is important that we try to identify the most important new policies and priorities and evaluate our investment allocations by the new forces impacting the market.
In our judgement, the most important policies and their likely impact on the market include:
Repeal Obamacare. One of Trump’s top priorities is to repeal the onerous health insurance legislation causing the staggering increase in health insurance premiums on small businesses. This would be positive for small businesses which provide most of the jobs in our economy.
Infrastructure Spending Stimulus Package. Trump seems to have a clear mandate to use extraordinary measures to stimulate economic growth. This would be positive for a wide range of companies that benefit from a healthy economy, particularly in the construction and manufacturing industries.
Rollback of Regulations. Trump has promised to reverse many of the regulations imposed by financial and EPA regulators that have hamstrung large and small businesses over the past eight years. The banks would be big beneficiaries of reduced regulations, particularly the small banks.
Tax Reforms…Economic Change May Take Priority over Climate Change. Tax incentives for wind and solar power most likely would not be renewed as they expire. Tax cuts for businesses and flatter individual tax rates would replace them.
Supreme Court Appointment. One of the first opportunities Trump has to make his mark will be to appoint the next member of the Supreme Court and the Republican-controlled Senate would probably expedite his choice. His efforts to reverse Obama Executive Orders and replace them with more business-friendly regulations most likely will not be challenged in court.
No Gridlock. Depending on your political views, this is either extremely positive or extremely negative, but the lack of friction in the news should be beneficial to the mood of our country…usually good for the markets.
A Stronger Economy Equals Higher Interest Rates and a Stronger Dollar. If Trump is successful in getting significant growth in the economy, we likely will face a stronger dollar, which is a serious headwind to companies doing business in other countries. Higher interest rates usually accompany a strong economy…beneficial to savers but more expensive to businesses (and governments) that borrow.
HOW DO WE REACT?
The surprisingly strong rally the market has demonstrated since the election has been impressive, but will it last? Unfortunately, nothing a new president can do will impact corporate earnings for several quarters, so don’t expect the rally to run straight up. A revitalized consumer will show up quickly in retail sales, auto sales and housing sales which may be all that is necessary to sustain the rally in 2017, but there could be some profit-taking and pauses along the way.
Interest rates on longer-term bonds have already jumped almost ½% and you probably will see a corresponding jump in mortgage rates which could be a problem for homebuilders if they don’t retreat. Utility stocks have dropped because of the perceived competition from higher rates, but a stronger economy could more than offset the drag from higher rates as long as interest rates and inflation remain moderate. We continue to believe a portfolio made up with a high percentage of utility stocks gives us a good balance between the “safe haven stocks” and stocks that benefit from economic growth.
A strong dollar, again, is tough on companies operating outside the U.S. so we will continue to focus on companies with primarily U.S. revenues due to the environment we anticipate.
Another report in recent days from the International Energy Agency confirms that there is still too much capacity and too much production in the oil industry. In our opinion, the only cure for too much production is lower prices, regardless of what the OPEC leaders would have us believe. Lower energy prices would continue to benefit consumers.
“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.”
As we usually like to repeat, we know how disconcerting the media can be and we welcome your phone calls to discuss any concerns you may have. Please let us know if there is any way we can be of assistance.
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Dave Crouch and not necessarily those of Raymond James.