I’ve spent a lot of time over the final two months of 2016 attempting to get my head around what a totally altered government and economic policy and world will mean for investment portfolios; as the old saying goes: “We’re not in Kansas anymore.” And as I said to a friend last month: “This is all just spice for the plot of the drama that we call life.” We don’t want the story that we all share to become boring and it doesn’t look like it will.
This month’s article shows MarketCycle Wealth Management’s current thinking of where I believe investment portfolios should be positioned based on the recent Trump win and the fact that the complete opposite side of the political spectrum will now be in power for 4-8 years.
After having been correctly bearish during all of 2008 and the first three months of 2009 (during the financial crisis) MarketCycle became fully bullish within two weeks of the financial crisis bottom and we have remained bullish ever since that date. So, YES we are still in a strong bull market and risk levels are lower than average (although bull markets always zig-zag on their path upward). The calculated U.S. recession chance 3 months out is at 2%, which is extremely low. Regardless of how the reader feels about President Trump’s other policies, he is clearly pro-corporation. If you are holding stocks as an investment, then you hold partial ownership in these very same U.S. corporations and you can profit as companies like Apple and Disney move higher.
Many of the most well-known hedge fund managers in the world engage in philanthropy, and in doing so, they often reveal their favorite hedge funds through a review of their foundation's public filings. Bill Ackman's Pershing Square Foundation invested in several hedge funds during the fiscal years that ended in September 2019 and September 2020.
The stock market and the economy are not synchronized. Stocks always move ahead of the economy… always looking into the future. They rise before anyone can see any concurrent improvement in the economy and they fall before the economy shows weakness. This is why investment professionals must use quantifiable leading data when investing and why they must look under the surface of what is obviously visible. It also shows why news and opinions and emotions never work as a long-term timing tool for investments.
- Taxes will likely be lowered for U.S. corporations and this would mean improved U.S. corporate earnings and a higher stock market. The proposed loosening of labor laws (that currently protect workers) will do the same. Since we are in the late-stage of the current market cycle, the best investment assets are likely to be: United States centered, non-leveraged mid to large-cap quality, growth and momentum stocks as well as the health-care and energy & materials sectors.
- Late-stage simply means the final third and not the end of the bull market; it is likely to last longer than people think. The most timid investors will slowly start investing during this period as they slowly move from optimistic to euphoric. When the last person becomes euphoric, then the market will begin its decent. Wall Street climbs a “wall of worry” and this includes fears of “record highs.” Despite a few (avoidable) recessions along the way, investors will likely see a thousand new record highs over the next dozen years because the market is going to keep zig-zagging higher.
- President Trump plans to decrease taxes on investment account profits. This would drive more money toward U.S. stock investments. His policies will likely cause higher inflation which will hurt fixed-rate bonds, again driving additional money away from bonds and toward U.S. stocks.
- There will likely be a repatriation of the United States Dollar (USD) because of an opportunity for (mostly large-cap) U.S. corporations to bring their Dollars back to the U.S. in exchange for a 10% tax rather than the usual 35% tax. They are likely to use this money to pay additional dividends and to buy back shares of their own stocks on the open market. This means that there will likely be opportunities in select dividend stocks (companies with less interest rate sensitivity such as in technology) and in mid to large-cap quality stock buy-back companies. (Yes, there are even “buy-back” ETFs although it takes a fair amount of probing to find the only good one. A sample of a good individual buy-back company is Apple Computers. This buy-back idea will only succeed if the tax reduction on repratiated USD passes through Congress and becomes law.)
- Despite Trump’s pledge, there will be only minor increases in infrastructure spending… at least until the next recession hits. This means that industrial stocks will likely perform better than usual and for a longer time period than usual.
- Energy & materials, banks and health-care (although hospital stocks may be hurt) will likely all be deregulated which means that the companies in these sectors will flourish.
- Inflation will increase which means that floating-rate bonds/preferreds and TIPS (Treasury Inflation Protected Securities) will benefit along with industrial materials and oil. Normally real estate would benefit, but we are in the late-stage of the market cycle and this is when real estate starts to temporarily peak with expectations of a future recession that may still be years away.
- Utilities and telecoms (which are a large part of many people’s investment portfolios) will likely suffer because of rising interest rates in the United States. Both are a bond proxy… rates up, utilities and telecoms down.
- The U.S. Dollar will slowly go up in value which means that the Yen and Euro will likely drop and that gold will present less long-term opportunity.
- Despite it being the late-stage of the market cycle, emerging market stocks (which include China and Mexico) will likely lag in relative strength (partly because of fear over Trump’s proposed 10% tarrifs) although they may catch a few bounces. With stocks, the U.S. will rule supreme over the longer-term. Europe and Japan will also likely continue to lag in relative strength over the longer-term. Japan may get a bounce as U.S. interest rates rise (causing the Yen to weaken) but it is also likely to get killed in the next global recession since the Japanese government (dangerously) owns such a gigantic amount of its own stock market. In the longer-term, Japan’s demographics will be a powerful drag on its economy… it is going to contain mostly retired seniors.
- Defence and military weapons manufacturers will likely get on a roll going forward (three days before Christmas, President Trump tweeted about the need for a “greatly” larger nuclear arsenal and the next night told a reporter: “Let it be an arms race.”). Those with a socially responsible inclination, while still supporting the military, may want to avoid investing in this area, as much as is possible.
- Environmental plays such as solar and wind technology will be harmed because of the deregulation of conventional energy, increased oil & gas production abilities and by the unfortunate upcoming destruction of environmental protections.
- MarketCycle Wealth Management constantly calculates and monitors recession probability levels and objectively quantified risk levels; this will be even more important going forward. The idea is to invest with safety and in the correct assets during the differing stages of the market cycle. It is equally important to know when NOT to invest (so, buy & hold does not work). For anyone that might be interested, MarketCycle manages people’s investment accounts for a low flat fee and we never charge additional fees on profits.
SUMMARY: The twists and turns absolutely have to be navigated correctly, but investors should continue to embrace their fears and be uncomfortably long (but in the correct assets!) and to ride out any temporary dips.