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Key Summary:
- Change is coming to Washington, there will be ramifications for investors.
- The over-arching theme is a more pro-business, less regulatory environment.
- Inflation & interest rates staying higher continues to be the base case.
Very Important thesis: If equities generate roughly ~10-11% a year over time, leading brands, dominant global franchises, particularly those serving the dominant driver of the economy, in theory, should compound at 13-15%+ over time. In a world where rates and inflation will likely trend higher for longer, business models with pricing power, exposure to quality factors, and that generate strong profits and free cash are set up to win versus broad markets. Brands Matter.
Election Uncertainty Has Passed.
Even though we have all been inundated with the hard data showing equity markets generally do not care whether a Democrat or Republican is in the White House, market participants were still on edge as we headed into Tuesday’s election. We will have a new President on January 20, 2025. As an investor, it’s nice to know what we should expect from President Trump, because we have seen the movie before in 2017 – 2021. Apart from the early part of the Pandemic period, the economy and stock markets generally performed well. I remember this period well and there were wonderful active trading opportunities along with solid buy-hold opportunities. Each period is different, and the future always looks different than the past but here’s what worked best the last time Trump was president: Between the inauguration January 20/2017 and just before the pandemic on 2/27/2020, The S&P 500 rose 57.9% as the baseline for a comparison. The Nasdaq 100 rose 96%, technology stocks rose 115%. The Consumer Discretionary sector was the second-best performing sector at +62%. Large Cap Growth was the best performing style box at +84% followed by Mid-Cap Growth. Like the recent past, Small-Cap Value was the worst performing style box +13%. Energy stocks were the worst performing sector -17%. Based on today’s reaction to the elections, the Financials could be a top performer, but one day does not a trend make. FYI, Financials have been leading all year as well.
Using AI via ChatGPT, I thought I would have some fun with cartoons to tell the story of what the market thinks about Trumps win. As I write this note, equity markets are hitting all-time highs with some very powerful moves across financial services and smaller, leveraged companies. My crystal ball is no better than anyone else’s but here’s what the market believes across certain themes where a Trump presidency is concerned.
The DNC Seems to Have Gotten Off-Course
The information I have currently says Trump won the popular vote and the electoral vote. The last time this happened for a republican was 2004 I believe. This is not a political statement; I try to stay out of politics. The DNC seems to have gone incredibly off course and has lost touch with the average American. That cost the Democrats dearly in this election.
Consumer Sentiment Should Improve
Election uncertainty is just one reason consumer sentiment has been lower than the stock market might indicate. With a Fed marginally cutting rates over the next 12 months and with the knowledge of tax cuts not being reversed plus other potential initiatives that could incentivize them to spend more broadly, consumers could be in a better mood heading into 2025. Remember, more spending is good for GDP and consumer stocks.
Trump Likes to Be in the News Daily
Like him or loathe him, Trump understands branding and we should expect him to continue his quest to be in the news almost daily. With algo’s driving daily volume on stock exchanges, everyone should expect bouts of volatility at the single stock and sector level on a frequent basis. This is wonderful for active trading, which is part of our 3-step investment process: Offense, Defense, Special Teams (fast twitch trading).
The Regulatory Environment is Going to Improve.
When one handbag and apparel brand isn’t allowed to be acquired by another similar company, you know the regulatory environment is restrictive. Corporate M&A is about to heat up. Private equity M&A and monetization’s should heat up. The brands related to this eventuality were on fire today. Corporate executives have been holding back from inorganic growth strategies because of onerous restrictions and regulations. Everything from anti-competitive behavior to same industry mergers and acquisitions have been stifled by the FTC and DOL. There’s a likely marketable improvement coming in corporate actions as the new administration inserts a less restrictive group of leaders.
The IPO & M&A Markets Could Roar Back
Because of a restrictive DOL and FTC, M&A advisory and IPO’s have seen below-trend growth for many years. With a Republican controlled government, we are set for a less restrictive regulatory environment which could drive economic growth to re-accelerate.
Interest Rates Are Reaching for the Skies.
Interest rates are up >20% since the Fed cut rates in September. Who saw that coming? With a massive budget deficit and higher funding costs, interest rates have been rising to account for rampant spending by the government. Whether Elon Musk can help Trump cut costs remains to be seen but for now, rising rates is not the friend of your bond portfolio or your bond proxy stocks. We should all expect interest rate volatility to stay elevated for longer. Perhaps that’s why so much money is moving to Private Credit funds? That’s why we have loved Blackstone, KKR, and Apollo for many years.
Re-accelerating Growth Should Push Inflation Up from Here.
Everyone loves economic growth and prosperity. With a less regulatory environment, more potential M&A and IPO’s, tax cuts that stick around for longer and potentially new, creative stimulus efforts, and a Fed that’s cutting rates, the potential risk of inflation re-asserting itself is not insignificant. While we do not believe inflation will heat up meaningfully, the rate of change going forward could be enough to cause consumers to stay in the “trade down and save” mentality. Our stock selection is certainly focused on this theme through the brands that offer consumers the best value, highest quality and differentiation.
Disclosure: The above data is for illustrative purposes only. This information was produced by Accuvest and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.
