Trump Bump: A New Era in Equities

markets-up-trump

After the most divisive presidential campaign in recent memory and a stunning upset on Election Day, Donald Trump is our new President-Elect.

On November 8th, as the votes were rolling in across the country, the nation watched as Trump began to pull off an unprecedented upset. President Donald J. Trump: an outcome that virtually no one predicted and many believed to be downright impossible. As the night wore on, global futures tanked as a Trump victory became more and more likely. America and the world went to bed in shock.

The next morning, however, marked the dawn of a new day. The sun rose and the opening bell rang at the New York Stock Exchange. Did the markets free fall, as expected? Not even close. The Dow Jones Industrial Average surged 250 points (~1%) – financial sector stocks alone popped 4% – the U.S. Dollar Index traded more than two-thirds of a percent higher, and treasury yields leaped on expectations of inflation and growth.

So, why was everyone so wrong? And more importantly, now what?

brexit

Early Indicators Ignored
On June 23, 2016, the United Kingdom (“UK”) issued a referendum to gauge the country’s support to remain a member of the European Union (“EU”), otherwise known as “Brexit” (“Britain Exit”). The result? An overall vote to leave the EU, of 51.9% on a national turnout of 72% – the highest ever for a UK-wide referendum and the highest for any national vote since the 1992 General Election.

Viewed as a major win for populism and British nationalism, the surprise Brexit vote was predicted to ruin the country’s economy. Market prognosticators feared that Brexit would shut the UK off from the mainland EU, erase the critical trade deals that the country depended upon and ultimately drive Britain into a deep recession. The markets had also “baked in” a vote to remain in the EU, as things trended upwards heading into Thursday’s vote. On Friday June 24, the FTSE-100 Index did plunge as anticipated, but by Monday morning, global markets had already begun to rally and actually ended the week higher. The “Brexit Bounce” had ultimately rendered the referendum a non-event.

So what does Brexit have to do with the US presidential election? This was significant for two reasons: 1) it legitimized the growing global trends of populism and nationalism, and 2) it should have taught us that the market is often not a good predictor of political events.

clinton

Misleading Projections
Flash-forward several months, and back across the pond, the United States is ramping up to Election Day. With every major news outlet and pollster projecting a Hillary Clinton win, the market is slowly baking in a Democratic victory as the outcome of the election was all but decided. Prominent news organizations and data-based pollsters such as The New York Times, FiveThirtyEight, Upshot, The Atlantic, Huffington Post and others had projected that Clinton would be the next President of the United States. Nate Silver of FiveThirtyEight was especially confident, saying this on November 8th:

“Clinton is a 71 percent favorite to win the election according to our polls-only model and a 72 percent favorite according to our polls-plus model.” – Nate Silver

With the exception of two or three polls, none of the experts got it right. Why?

My firm belief is that the underlying methodology of polling is out-dated and woefully inaccurate. The “silent majority” of Trump supporters that were either completely ignored by the polls or were possibly too embarrassed to admit their allegiance to Trump – should never go unrepresented. With lower response rates than ever, telephone polls are an incredibly antiquated tactic and the quick-fix of demographic weighting cannot provide an accurate cross-section of the country’s voter base. There has to be a better way of collecting mass quantities of nation-wide data. Additionally, I believe that you can’t fully grasp the magnitude of a candidate’s popularity without actually going to their campaign events and speaking with their most fervent supporters. Clearly we have a lot of angry voters in this country who are sick and tired of the current status quo of the political establishment.

Despite witnessing a successful Brexit vote overseas, many Americans were comforted by Clinton-leaning polls and media bias; these factors were critical in creating an election bubble, as many firmly believed that there was no way Trump could actually win.

So now that the bubble has popped and we face a Trump presidency, the question for retail investors becomes: what should we do now?

GTY 460643364 A FIN MAX USA NY

“Trump Bump”
In the hours following the election, equity markets quickly digested the surprise results and began a massive rally. Now several weeks removed from November 8th, equities continue to reach new heights as we march into uncharted territory in what has recently been dubbed the “Trump Bump”.

MarketWatch financial journalist, Matthew Lynn accurately summaries the current surprise equity market rally and the plight of unsuspecting investors:

“Right now, investors are making two big mistakes. First, they have lost the ability to read the political weather and work out what kinds of governments are likely to be elected. Even worse, once the populists take power, they assume they will be bad for equities, when it often turns out to be the other way around. Until they can fix that, they are going to keep on getting it wrong — and will lose a lot of money in the process.” – Matthew Lynn

So, in the midst of this surprise bull market that few investors were prepared for, what is a retail investor to do?

1. Recognize What is Driving the New Bull Market
The hot industry sectors right now are financials (banks), industrials, healthcare and defense. Why? Remember that prior to the election, investors had assumed a Clinton victory and had positioned their portfolios away from industries that were supposed to face increased regulation. Combined with the impending interest rate hikes, investors are scrambling to find security in equities as a Trump presidency brings about new economic drivers. With sweeping promises to repeal Dodd-Frank and Obamacare, Trump has provided banks and healthcare providers with new tailwinds. Additionally, Trump’s nationalistic rhetoric and aggressive stance on foreign policy has made the defense sector a popular haven for investor dollars. These are all important market-movers, but the real driver is Trump’s massive $1.0 trillion infrastructure plan, which is largely centered around bringing back jobs from overseas and providing corporate tax cuts for power & utilities and construction companies.

To the extent that any of this reform is actually achievable is certainly up for debate, but what we know for sure is that this is his plan and it will take time to execute.

2. See What The Market is Missing
While many of the aforementioned sectors have already seen substantial rallies, there are still plenty of opportunities other major industry sectors, such as consumer and technology. Personally, I always like consumer & retail names heading into the holiday season and I think there’s plenty of reason this year to believe that Trump’s income tax cuts will inspire increased consumer spending going forward.

However, in my opinion, the opportunities on the tech side are far more attractive. The technology sector has been on a massive slide since Election Day (known as the “Trump Dump”), and many quality stocks are currently undervalued. While we all know that Trump’s views on trade and immigration are likely to hurt Silicon Valley, tech companies with large stockpiles of cash overseas stand to gain a lot in repatriating that liquidity. Tech giants such as Apple, Microsoft, Cisco and Oracle are intently focused on this and should be considered as potential investments.

3. Stay Patient
Realize that even if Trump can successfully enact all of the positive growth initiatives in his economic plan, it will take time to execute. Even though Trump has a lot of tools at his disposal – Republicans maintain majorities in both the House and the Senate – swift change is never easy in Washington. Trump and the Republican party brass know that they really only have a two-year window before the next major election, so I expect Trump to aggressively pursue his strategic plan despite a history of gridlock in D.C.

In other words, it’s important to remember that while the first two years will be crucial for the Trump cabinet, implementing their plan will be a slow-moving process.

Final Observations
If you remember nothing else from this article, keep these three things in mind:

1. The market isn’t as good of a political indicator as we thought

2. Observe the Trump herd, but look for other opportunities in this bull market

3. Trump’s economic plan, while promising, will take time to implement – stay patient

 

Next time we’ll dig deeper into the treasury sell-off and the massive shift from bonds to equities, as investors run for cover in anticipation of the Fed’s interest rate hikes.


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