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Red Wins! The Impact Inside Your Portfolios


Red Wins! The Impact Inside Your Portfolios

Written by: Blaine Rollins, CFA | 361 Capital

Well that was unexpected. I don’t think anyone had Hillary Clinton winning Minnesota by ONLY 1.4%, much less the GOP sweeping two branches of the U.S. Government and looking to line up the third branch (i.e., Supreme Court).

So now what?

What I wrote on Sunday still holds true today: “the markets like nothing more than certainty.” As it stands today, we are very far from certainty. We do not know the exact details of Donald Trump’s plans, but only his ideas and the bits and pieces we learned on the campaign trail or in his acceptance speech last night. Trump’s closest advisors cannot even discuss his exact plans because they do not know. So, the violence in the overnight markets was easily explained by this new uncertainty. Trump’s acceptance speech did calm the markets and reel them back from their worst levels.

And as of this morning, the U.S. averages are healing and recovering, but with extreme sector moves under the surface as the market speculates how new policies might affect all industries. What does look certain? First, volatility will be tested as Trump builds and rolls out his team and ideas to the markets. Second, active management just found its three point shot. Just look at the market map today, on either a sector or a geographic basis, and you will see some areas up big, while others are down big. This will continue in the future weeks and months as new policies and laws are brought to the table. There will be much alpha to add by active managers if they can read the tea leaves correctly.

If you want some specific insights into Trump’s plans, his Contract with the American Voter might be a good place to start.

Some other items that I would think about and consider the impact of inside your portfolios:

  • While some Fed members said that they could wait on raising rates if Trump became President, if his higher spending, lower taxes acceptance speech is any indication, then inflation could accelerate which could lead to Fed tightening. Of course, the composition of the Fed may be changing in 2017 as Trump has previously said that he would replace Janet Yellen.
  • Bonds and rates reversed hard after the acceptance speech as $1 trillion in promised spending on infrastructure was paired with corporate and personal tax cuts. The bond markets do not like the pairing of higher spending with the only way to fund it being the U.S. Dollar printing machines.
  • Coal, Oil, and Natural Gas are all big winners as restrictions will come off and drilling and mining will be unleashed. Good for service and equipment companies. Trains, trucks and pipelines will also benefit from the increased movement of fuels.
  • Promised infrastructure spending of $1 trillion will benefit engineering, equipment & materials suppliers (think American steel and aggregates).
  • Banks and Financials look great. Not only will interest rates glide up with inflationary pressures, but Federal regulations will get axed and Senator Warren moves to the back of the room.
  • Defense stocks get an increased spending nod last night. But watch how the spending may change if Trump pulls out of NATO, the Philippines and any other country that no longer wants our presence.
  • Within the Healthcare segment, Obamacare is removed. Hospital stocks will see less utilization and an increase in patients who no longer have insurance. HMOs will need to unwind everything that they put in place to implement Obamacare, but will no longer need to fight the government over all of the unprofitable business that they had on their books. Drugs and Biotech get a ‘no more Hillary’ hall pass, but there will still be immense government pressure on prices.
  • Changes in immigration will not just impact lower-end service employers like restaurants, hotels and other leisure, but it will also hit high-end tech and sciences, which is why the entire Silicon Valley lined up behind Hillary.
  • An end to the TPP and NAFTA plus future trade wars could create input cost volatility and end market disruption for U.S. corporations (think auto & tech companies who design in U.S., but manufacture or get components from outside of the U.S.). Also, any retailers that rely on cheap imports will see either much higher prices for those goods or complete unavailability.
  • A promise of falling Corporate tax rates from 35% to 15%, plus the repatriation potential of offshore cash, will be good for wages, capex and stock prices. A reminder of some of the large offshore cash hoards: AAPL $215B, MSFT $102.6B, GOOGL $73B, CSCO $60.4B, ORCL $52.3B, PFE $39.3B, JNJ $38.4B, AMGN $31.4B, INTC $31.3B, QCOM $30.6B.
  • Also personal tax change promises in cutting rates from 39.6% to 33%. Maybe also some structural tax changes to simplify the tax code and the size of a 1040 form?
  • Will M&A become unleashed? The Department of Justice will be flipped to one more friendly, but might need to consider the increased uncertainty of future cross-border deals.
  • Hollywood real estate under pressure today. A very long list of celebrities who have vowed they’d move out of the U.S if Trump won: Rosie O’Donnell, Bryan Cranston, Jon Stewart, Samuel L. Jackson, Cher, Lena Dunham, Al Sharpton, Oprah, Mylie Cyrus, Whoopi Goldberg.
  • Probably a good bet that Washington, D.C. real estate will come under pressure as the size of government shrinks, combined with a significant reduction in the lobbying industry.
  • If you are long Amazon, you may want to revisit this comment: “I have respect for Jeff Bezos, but he bought the Washington Post to have political influence,” Trump said in May. “He owns Amazon. He wants political influence so Amazon will benefit from it. That’s not right. And believe me, if I become president, oh do they have problems. They’re going to have such problems.”

If you are an active investor, you have a lot to think about now. Hopefully this short and incomplete list will give you some things to consider. This really is a new day for everyone as so few predicted a 100% GOP outcome. We will all be learning on the fly together and the markets will be constantly moving to reward and penalize. It will be uncertain and full of butterflies in the stomach. Just like that first airline trip.

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