Before I get started here, let me reiterate what I said a few times in my last post – this is a strictly non-partisan blog and I do not ever favor one candidate or party over another here. To the extent that I am talking about “politics”, it is for the purpose of explaining how what is going on in the political world effects my investment decisions. My opinions about the impact of particular policies on the economy or the stock market do not necessarily mean that I either support or oppose those policies (in many cases I support polices which are not good for my individual bottom line). If I poke fun at your chosen one, please don’t take it personally, I make fun of everyone. If you still get offended after all of those disclaimers, your time may be better spent sounding out the words on another website.
In my last post I talked about what I believed would happen in the stock market in the days and weeks following the election, and noted that at the end of the day none of the possible results should by itself impact the economy’s overall recovery. So whatever happened in the short term as people bought or sold based on their conceptions of what impact a particular candidate would have on the market, over the long term I didn’t see any reason to change my strategy. And even in the short term I thought the effects would be relatively short-lived.
The short term drop and recovery I predicted in the event of a Trump win happened, but much, much faster than I anticipated and it was so quick that most US investors were not impacted by it at all. After it became clear that Trump had won, panic selling ensued around the world and in the futures markets, with the S&P 500 down more than 5%. But by early morning, that loss had been cut in half and by the time the market opened, the removal of uncertainty apparently balanced out the sellers and we opened flat. By the end of the day, the S&P 500 was up 1.11% as institutions unwound their hedges and other defensive trades.
The market had priced itself for a Clinton win, but one close enough that Trump would declare the results illegitimate. A clear win by either candidate was a better outcome for the market which hates uncertainty over just about anything else.
Bottom line(s) up front:
Thrift Savings Plan: there is nothing to indicate there will be a change in the economic conditions on which I base my TSP strategy over the next few months. So for now I am staying with my current allocation (85% C Fund, 15% I Fund). (Note that I have been planning to exit the I Fund for a number of months now and the Trump win makes that even more likely as I will discuss in the “Losers” section ). I will talk more below about what impacts President-elect Trump’s campaign promises could have on the US and global economy over the long term below
Investing in individual stocks: this is a more interesting area in the short term, with certain sectors making strong moves in one direction or the other. I will write a bit below about which sectors appear likely to benefit or be harmed under the combination of a Republican congress and Trump White House.
Separating emotion from investing
I had a number of colleagues who were absolutely convinced back in 2008 that electing a “socialist” Barack Obama was going to tank the markets and so they pulled their money out to the safety of the G Fund or F Fund until he could be replaced by a “business friendly” Republican. They now have half as much money in their Thrift Savings Plan as I do. Now I suspect there are some folks on the other side of the aisle who will do the same following a Trump election.
As you will recall from my last post, there is virtually no difference in average stock market performance under Democrat and Republican administrations, with the small edge to the Democrats explainable by any number of other factors which impacted the markets during those periods. So nobody on either side of the political fence should be getting too terribly worked up about the change in party come January.
President-elect Trump, of course, is not your run-of-the-mill Republican. And there is very little to indicate so far whether his administration’s policies will match his stump speech rhetoric or hew more closely to those of the Wall Street and Beltway insiders who appear to be lining up for the key positions in his inner circle.
But even if you are absolutely convinced that a President Trump will be a loose cannon, unleashing chaos domestically and internationally, and no matter how convinced you are that the US has made a terrible mistake, take a deep breath. Remember that our constitution is engineered to limit the damage that single president can do, and our ever expanding economy has weathered wars, depressions, runaway inflation, various bubbles, uncountable scandals and the near-collapse of the financial system.
Elections can mean big, fast short-term swings for stocks and other investments, but they historically have had minimal impact over the long term. Since World War II, stocks have ended up higher under every president except Richard Nixon and George W. Bush.
Notwithstanding the positive performance of the market in the last week, my sense is that we will see a fair amount of volatility in the next year due to the uncertainty which Trump brings to the table. But that’s okay, stocks are long-term investments, meant to be held for many years. Big swings in the interim are normal and should be expected. That higher volatility is the price that investors pay in exchange for the higher returns that stocks provide over bonds and other investments. And the market adjusts to even the most unexpected surprise relatively quickly. Nassim Taleb writes all about the impact of improbable events in his brilliant The Black Swan. And I am confident that we will survive our Orange Swan.
Trump policy impacts on the economy, stock market and TSP
Nobody really knows what sort of policies we will actually see from a Trump administration, but I will run through some of the main points of his platform and share a comment or two on what impact I believe those could have from an investing perspective. This is not meant to be at all exhaustive, and almost none of these issues will turn the economy on their own, so at this point none of these will change my investing strategy.
My biggest concern is that Trump’s election could eventually lead to a global trade war, which would drag down profits for big U.S. companies which depend on customers in China, Europe and elsewhere, and cost jobs at every US company which does business overseas. 40% of the profits of the companies in the S&P 500 (the TSP C Fund) are generated overseas.
The concern is all the more real, because the President has wide latitude to effect trade independently of Congress. The US could pull out of NAFTA six months after notifying Canada and Mexico of intention to do so, and imposing tariffs on imports is also within the powers of the president
Trade is complicated. It is easy to say that you will force companies to build their products in the United States in front of a cheering crowd, but much harder to enact polices to make that happen without unintended consequences. 70% of the parts in Honda CR-Vs assembled in Mexico are made in US factories. Are those CR-Vs good or bad for American workers? BMW (a foreign company) makes 200,000 vehicles every year at a plant in Spartanburg, SC, so that’s good, right? But 90% of the parts used in those vehicles are manufactured overseas, so the plant is bad? But more than half of the vehicles produced in the plant are exported to foreign buyers, so back to good? The globalization of supply and sales chains makes things tricky, doesn’t it?
One of Trump’s most consistent promises on the campaign trail was his pledge to declare China a currency manipulator on his first day in office. That is well within his powers, but would be ironic, because while China artificially depressed its currency for years to boost exports, for the past two years it has actually been propping it up to slow the flow of funds out of China.
There is a very high risk of recession if all the talk ends in a trade war. Protectionist policies may well help workers in a particular industry, but will always create a drag on overall productivity. The results would be depressed profits for US companies and higher prices for US consumers, leading to lower spending, lower capital investment and lower employment.
It remains to be seen whether overall immigration will be reduced under a Trump administration, but population growth is a key input for economic performance from a macro economic standpoint. A reduction of the labor force drives up wages and prices, reduces productivity and reduces potential GDP growth.
The attraction of foreign talent to US companies has been a massive driver of stock market growth, with 40% of US Fortune 500 companies founded by immigrants or their children. Iconic US companies created by immigrants include AT&T, Pfizer, Goldman Sachs, Dupont, Kraft Foods, Colgate, Procter & Gamble, Comcast, and Nordstrom. More recently, immigrants have founded more than half of US startups valued at over $1 billion. Google, Yahoo!, eBay, Uber, Stripe, Tesla, SpaceX, and Palantir all have at least one immigrant founder.
Trump has said he will cut corporate tax rates from 35% to 15%, as well as allow repatriation of money earned by US companies overseas at a 10% rate. Effective tax rates are much lower for most companies so the windfall would be less than it appears, but both of those actions would still provide a major boost to the earnings of large US corporations.
Any such tax cut is dependent on congressional action, however, and even with Republican majority in both houses would likely require some difficult tradeoffs. Most problematic is where the money would come from to replace those tax revenues. All Trump has said so far is that higher economic growth will make up the difference, but that’s hard to bank on.
There have been wildly different numbers depending on the speech, but it seems to boil down to a $500 billion to $1 trillion surge in spending on infrastructure paid for with a combination of debt financing and tax credits. If it happens, this would be the fiscal policy half of the equation which has been missing from the recovery and would be great for the economy. Boosting spending leads to new investment and hiring, which prompts further spending in a virtuous cycle.
That spending and an increase to the debt ceiling would have to make it through the Republican controlled Congress, however, where members have been stridently opposed to spending increases.
Speaking of the debt limit, the federal borrowing limit will have to be raised by next summer to avoid default. Republicans have been loathe to raise it in recent years for political appearance and relied on Democrats and Republicans in very safe seats to raise it, even though it is absolutely necessary and completely meaningless in a practical sense. Now that the Republicans own the the government, it will be interesting to see if this sails through or if we will go up to the deadline again. The last time we did, it was bad for the market, although we recovered fairly quickly.
Individual stock investing after the Trump win
From a very short term perspective, this was a great week for me. Rough mental arithmetic puts my paper gains since the market opened last Wednesday morning well north of $100,000. The overall market’s move up was nice, but it was the performance of certain sectors which really made a difference. I have a disproportionate percentage of holdings in the tech, pharmaceutical/bio-tech, financial and oil sectors. Tech has responded poorly to the Trump victory, but the stocks of drug companies, banks and oil companies have all run up nicely in anticipation of friendlier treatment at the hands of a Trump administration than a Clinton administration.
I will very briefly run through the sectors which appear most likely to be impacted by the Trump victory, some of which may be more perception than reality.
Defense stocks: Trump has called for increased spending on the military, which translates to increased profits for weapon manufacturers and defense contractors.
Pharmaceuticals: Trump is viewed as being in favor of less regulation, while it was expected that Clinton would have tried to crack down on rising drug prices. Drug company stocks have skyrocketed since the election, with some of my holdings up 20%.
Oil: Trump has come out in favor of loosening restrictions on the energy industry and reducing regulations on drilling. That could bode well for energy companies which produce fossil fuels as well as service companies which support them.
Banks: Trump has been all over the map on banks – talking about breaking up big banks in the same speech in which he talks about loosening regulations and restrictions. So far the market seems to believe his more traditional Republican policy guides will win out and the big banks will have fewer restrictions over the next several years.
Construction equipment manufacturers: Caterpillar and the like will benefit if the US goes on an infrastructure building binge
Health insurers and hospital systems: if Obamacare is fully repealed and 20 million Americans are removed from the ranks of the insured, that will mean significantly less business for insurance companies (which to be sure are still struggling to figure out how to price coverage for their new customers) and hospitals (which were making a lot of money from these newly insured patients). A lot will depend on what the Republicans replace it with.
Renewable energy: solar and other renewable energy producers will suffer from lower oil prices, fewer restrictions on coal for electricity generation, and reduced subsidies.
Car manufacturers: US manufacturers can compete on price with Asian and European companies only because they moved low skill, high labor tasks to cheaper locations. If the North American automotive industry’s supply chain is broken up, prices for US cars will jump. And that doesn’t even take into account higher tariffs for vehicles exported from the US if a trade war breaks out.
Exporters: Trump would need to work with Congress to modify long-standing trade deals, but if he succeeds it would result in losses for companies that export heavily to other countries. And most large US companies are exporters – remember I noted above that a full 40% of the earnings of companies in the C Fund are generated overseas.
International stocks: Emerging markets will suffer the most, but developed markets will be hurt as well. Drags on foreign companies and economies include repatriation of overseas profits pulling money out of foreign subsidiaries, “soft protectionism” including local content requirements for publicly funded projects, and a strong dollar resulting in tightening of foreign financial conditions (foreign companies race to pay down dollar denominated debt because it is more expensive to pay off instead of investing and growing). Trump’s election will likely provide a boost to other populist politicians who will favor protectionism in their own countries, with elections coming up in Italy, the Netherlands and France. About 14% of Europe’s exports go to the US, and even a modest decline could be enough to tip the Eurozone into recession.
I know that’s a little all over the place, and certainly not conclusive in one direction or the other. But that’s the nature of the stock market – we really can’t predict what is gong to happen, just have a general sense of what the possibilities are and try to make decisions based on the probabilities. A trade war would likely have fairly quick effects on the economy, but anything else should show itself in the indicators over a period of time so I am content to sit back and wait for the data to come in.
It occurs to me that with my follower count well into five figures, I have the ability to point a few readers towards small businesses which I like and perhaps have a positive impact on them. With that in mind, this month’s favorite small (super small) business is the Dresden Stollen Bakers. They bake stollen Christmas bread for one week each year, and it has become a wonderful tradition for my family. They don’t have any idea who I am and I’m not getting anything for recommending them, just something I like. The last day to order for Christmas 2016 is November 15, so don’t dawdle.
The Next Update
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