Market Bulletin: Trump Election

Wednesday, November 9, 2016
by Ric Palombi, CFA

Making major headlines leading up to the election, and then throwing the markets into whipsaw today – one thing that is prevalent is that Donald Trump, as the new President of the United States, is very controversial and  largely misunderstood, and there is evident panic and fear of the unknown. Below we’ve highlighted what the world already knows up to this point in time, but then discuss a key element in Trump’s policies that we believe the market is missing.

Based on his acceptance speech, we believe the US economy may benefit from Trump’s election in the following ways:

  1. Increased spending in inner cities, hospitals, and infrastructure (such as roads and bridges).
  2. He wants to double the growth rate of the US economy (vague on exactly how).
  3. Corporate tax reform: First, to lower the corporate tax rate from 35% to 15%. Second, multi-national companies which have large cash positions outside the US will be able to repatriate at a tax rate of 10%-15% (significantly lower than current levels).
  4. Unifying: Trump should be able to unify the Republican Party and pass significant legislation as both the House and Congress have a Republican majority.

We believe the US economy may be hurt by Trump’s election in the following ways:

  1. Increasing trade barriers and tariffs will hurt GDP growth (economic growth).
  2. Foreign policy:  His relationships with other countries and NATO will be watched closely for signs of strain and conflict.
  3. Protectionism: His slogan “Making America Great Again” cannot be predicated on an isolationist policy forgoing the rest of the world.
  4. Volatility: Trump has a proven track record of making erratic statements. We believe the markets will be sensitive to this and therefore his policies may lead to increased economic and market volatility.

Investors have made a knee jerk reaction to quickly position in stocks and sectors where they feel the policies will benefit the most. We believe, however, that the market is missing or underappreciating a common thread that runs through both the potential benefits and costs of the Trump policies - and that is higher inflation. Regardless of success or failure, his policies are more inflationary than market consensus believes, which suggests that interest rates will need to adjust higher and faster than market participants currently expect. To us, this suggests that the unwinding of the low beta, low volatility, and higher yield investment strategies, which are so crowded and driving valuations of these stocks to unsustainable levels, is at hand.

How we are positioned:

  1. Should we be correct in our reflation belief, our thesis for why we continue to hold global banks has strengthened, as banks benefit from rising bond yields and a steeper yield curve, especially if the regulatory environment is less hostile
  2. We will see our thesis unfold as beaten up high quality cyclicals will continue to recover in sectors like materials and industrials. We expect stocks like CF Industries, Southern Copper, and Union Pacific to outperform.
  3. As mentioned in our recent Outlook Commentary, we believe the undervalued healthcare sector will recover and companies such as Express Scripts, Varian, and Davita will outperform.
  4. We are selectively reducing our portfolio exposure in interest-sensitive sectors, such as utilities and REITs.

Though the future global impact of a Trumperica is unknown, our team will not waver from our investment process. We will use any volatility in the markets to add to existing or new positions where valuations are met, we continue to look for the best opportunities in various sectors, and conduct ongoing evaluation of our current stock holdings.  



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