Since the start of 2016, I’ve been writing that we have officially entered the late-stage of the normal market cycle. Now that we have a new President elect, we are still in the late-stage and this hasn’t (and cannot) change, however, portfolio positions do need to be altered. I believe that the results of this election took the majority of the globe by surprise.
During the late-stage, which normally lasts from 1-3 years (before the next economic recession hits) certain assets typically perform well: TIPS (Treasury Inflation Protected Securities), floating-rate preferred shares & bonds, commodities, gold and stocks in the following flavors… quality, momentum, dividend, late-stage sectors (energy, healthcare, etc.) and emerging markets.
What has changed? President-elect Trump has repeatedly pledged to harm emerging markets so this stock selection MUST be removed from the late-stage list. But some of the others will become even stronger: commodities, gold, TIPS and floating-rate bonds and this is because Trump’s policies will increase the deficit and run inflation at much higher levels than would have a Clinton administration.
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
Technology has been temporarily harmed because he had publically threatened to get even with them after the election because he felt that they had ganged up on him during the election (I’m not taking sides, just stating facts). Because of this, tech fell hard for several days after the election but it seems to have found a bottom on 11/11/16 and this is why the entire “market” didn’t advance after his election, it was mostly the dividend-paying DOW type of stocks that rapidly gained. A lot of other assets were very temporarily and needlessly hurt (such as variable-rate preferred shares which still does not make sense to me).
What sectors will receive an additional boost? Biotech & pharmaceuticals (healthcare), energy and banks and this is because of his promise to end regulations. Floating-rate bonds will also excell. All of these naturally fit in with the late-stage theme.
What sectors will be harmed? Environmental stocks, alternative energy stocks, utilities (I’ve already mentioned emerging markets) and fixed-rate bonds will lose value as inflation picks up.
So, what do we do? It is simple, with President-elect Trump now in the line-up one should likely avoid emerging market “everything” but keep all other typical late-stage assets and HOLD ON throughout the late-stage and until the next economic recession hits. One of MarketCycle’s strong points is repositioning (and protecting) portfolios BEFORE recessions hit and we plan to do it again before the next one arrives. Again, it is relatively simple.
Article by Stephen Aust, MarketCycle Wealth Management