Cornerstone Macro, Druckenmiller Warn This Election Year, It’s Not Just Trump Investors Should Worry About

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Cornerstone Macro Warns This Election Year, It’s Not Just Trump Investors Should Worry About

Sixteen. That’s the number of Republican presidential candidates who ended their campaigns since last summer, leaving only businessman Donald J. Trump as the presumptive GOP nominee. Love him or hate him, it’s time to come to terms with the reality that Trump’s name will likely be appearing on the ballot in November.

As a money manager, I’ve always said that it’s the policies and not the party that matter. So it is with Trump. Many of his proposed policies certainly bode well for the market, including lowering taxes and scrapping needless regulations that slow business growth. Like his former rival for the GOP nomination, Ted Cruz, he has expressed support for a return to the gold standard and reportedly owns between $100,000 and $200,000 in gold bullion. In 2011, he even accepted a 32-ounce bar of gold as a deposit from a Trump Tower tenant.

However, as I told Kitco yesterday, I believe investors’ fears of a socialist Bernie Sanders presidency, not to mention negative interest rates, have driven a lot of gold’s recent momentum, more so than the idea of a Trump presidency.

At the same time, Trump has taken positions that should concern investors. Besides exhibiting a volatile temperament and leadership style, he’s been a harsh critic of free trade agreements and has made clear his opposition to the Trans-Pacific Partnership (TPP), which aims to eliminate up to 18,000 tariffs among 12 participating countries. Andy Laperriere, head of policy research at Cornerstone Macro, believes Trump’s trade agenda could even pose some risks to American multinationals, especially those dealing with Mexico and China, and the U.S. dollar.

Plus, there’s the troubling comment he made this week on CNBC, proclaiming himself “the king of debt,” before adding: “I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So therefore you can’t lose.”

So What Are the Odds, Really?

Cornerstone Macro Pic Your Poison NBC/WSJ Poll among Registered Voters, April 10 - 14
Cornerstone Macro

The cards are markedly stacked against Trump when it comes to winning in November. Most national polls show Hillary Clinton beating him in the general election, even though she is nearly as unfavorable to registered voters, according to an NBC/Wall Street Journal survey. Renaissance Macro Research calls Trump’s “net negatives prohibitively high.” And as I shared with you way back in August of last year, Moody’s Analyticsforecasts a win for the Democratic nominee, whether that’s Clinton or someone else. Since 1980, Moody’s sophisticated election model has accurately predicted the outcome of every single contest, and in 2012 it even nailed the Electoral College vote.

Trump still has quite a lot of support in the financial industry. A Financial Advisor poll found that, as of today, a little over 50 percent of respondents say Trump will win the White House,while nearly 37 percent say Clinton. Doubleline Capital founder Jeff Gundlach also believes Trump will be the victor, arguing that in the short term, this would be positive for the U.S. economy. The New York billionaire, Gundlach points out, has promised to build up the military and initiate an infrastructure program.

Whomever voters end up electing in November, there will be winners and losers. Again, what’s important to look at are the policies because they’re precursors to change. We’ll be watching the events as they unfold closely and adjusting our allocations accordingly.

Municipal Bonds: The Solution to “Sell in May”?

We’re now in May, which is when many investors consider whether to sell or stay in the game during the summer months, thought to have some of the worst performance of the year.

Cornerstone Macro Sell in May and Go Away?
Cornerstone Macro

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While there might be evidence to support this strategy, it’s worth digging deeper before making a decision. Again, this is an election year, and today McClellan Financial reports that in the fourth year of a president’s second term—in other words, when he is ineligible for reelection and we must therefore choose a new president—the market has fallen 1.6 percent on average during the May-October period, based on data from 1936 to 2012. This is caused presumably by the uncertainty over who might replace the incumbent, and how his (or her) policies might affect the market.

McClellan also suggests that May might not be the most opportune time to get out of stocks in these years, as the market has typically bottomed mid-month, then rallied into June and July. That means it might pay to hold out until then to sell off, if that’s what you plan to do.

What’s more, Cornerstone Macro says that “sell in May and go away” only works when leading economic indicators are decelerating. (In such years, returns have been negative 2 percent on average.) When they’re rising, the summer months have returned an average 6 percent.

So are the leading indicators rising or lowering? Well, today the Bureau of Labor Statistics revealed that the U.S. added 160,000 jobs in April. Although this figure is positive, it represents a seven-year low and is well below the 205,000 that economists had expected.

Manufacturing also shows continued signs of weakness. The April global purchasing manager’s index (PMI), which we follow closely, came in at 50.1, a reading that’s barely above the standstill threshold of 50. In addition, the U.S. manufacturing PMI fell to 50.8, its lowest level since September 2009.

Cornerstone Macro JP Morgan Global Manufacturing Purchasing Manager's Index
Cornerstone Macro

click to enlarge

There’s also the news that Chinese banks’ bad credit could actually be nine times larger than previously believed. Although not an “economic indicator,” this should give investors pause, as potential losses could reach as high as $1.1 trillion, according to brokerage firm CLSA.

So there’s a lot of overlapping analyses to consider here. Regardless of how you see it, when you take into account the additional volatility this second-term election year could yield, it might be a good time to consider diversifying into investment-grade, short-term municipal bonds. Munis have been shown to perform well over time, even during periods of market instability and rising interest rates. They’re also tax-free at the federal level and often at the state level if you happen not to live in one of the seven states that doesn’t levy a tax on income.

An old investing rule of thumb suggests that whatever your age is, that is the percentage you should have allocated toward tax-free munis. So if you’re 40 years old, 40 percent of your portfolio should be in short-term munis, 50 percent if you’re 50 years old, and so on.

The bottom line is, if you feel skeptical or fearful of the consequences of Election Day, it might behoove you to look into short-term, tax-free munis.

Follow the Money: Druckenmiller Maintains His Massive Bet on this “5,000-Year-Old Currency”

Speaking at the Sohn Investment Conference in New York this week, legendary hedge fund manager Stanley Druckenmiller warned investors that the equity bull market, propped up by “the longest period ever of excessively easy monetary policies,” is now close to exhaustion. He called negative interest rates an “absurd notion” and noted that central banks are now borrowing more “from future consumption than ever before.”

As such, Druckenmiller is wagering on gold. Heavily.
Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered a spectacular 30 percent on an average annual basis. That’s a superhuman feat, one that unequivocally demands we take note of his investment choices. His Duquesne Family Office fund is reportedly up 8 percent so far this year.“Some regard it as a metal,” he said. “We regard it as a currency and it remains our largest currency allocation.”

In August, I reported on his move to make a gold ETF his number one holding, followed by Facebook, a choice that has served him well. The yellow metal is currently up 18 percent since the beginning of August.

As always, I recommended a 10 percent weighting in gold—5 percent in gold stocks, 5 percent in bullion, coins and jewelry. Rebalance every year.

Cornerstone Macro

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