The Trump Bull Market
When sentiment changes in the stock market, it is a thing to behold. If you go back to important bear market bottoms, you can easily see the speed with which investors discard their old ideas that stocks are dangerous and embrace the notion that stocks have suddenly become the place to be.
On Friday, March 6, 2009, stocks were still hated, especially banks. The S&P 500 opened higher that day but quickly succumbed to the rampant selling that had driven the index down 22% in just the previous month.
But then on Monday, March 9, everything changed. Banks rolled higher that day, putting in 15–20% gains. The S&P 500 finished up 6%. Sentiment had reversed over the weekend. And when you see sentiment change like that, you'd better get on for the ride or stay out of the way.
A similar thing happened after the surprise election of Donald Trump. Sentiment for stocks reversed, and it's been off to the races. It's a little unusual to see such a powerful move come when stocks have been trading pretty well. But when we look back to how individual investors felt about stocks a month ago, the change is palpable.
It's not that people hated stocks like they did in March 2009. But there wasn't any enthusiasm, that's for sure. Economic growth remained weak, companies weren't investing in their business, earnings growth was stagnant, valuations were on the high side, and the Fed was the most important sentiment indicator.
But there was more to it than that. The Obama administration had set a somewhat adversarial relationship with Corporate America. Banks were targeted, and there was discussion of breaking them up. Corporate tax rates were left at their ridiculously high rate.
If you consider the success of U.S. businesses to be part of our national interest, well, there wasn't a whole lot happening to help them be successful.
I can't tell you that our next president will actually be more business friendly. But the 180-degree shift in sentiment says investors believe he will be.
A Business-Friendly President?
The shift in sentiment that occurred in the wee hours of Wednesday morning on November 10 produced an amazing rally. Bank stocks are the perfect example. They were vilified under Obama, and Trump says he wants to make things easier on them by reversing some or all of the Dodd-Frank banking regulations. That right there (along with an imminent interest rate hike) has pushed Bank of America up around 30%.
Will Trump reverse the Dodd-Frank regulations? I don't know. Personally, I like the idea of letting the banks buy their way out of regulations by maintaining more Tier 1 capital. That rewards good behavior.
And it would be a far cry from the last six years, when banks had to get their plans to raise dividends approved by the Fed.
Trump has also said he wants to offer companies a tax holiday to bring offshore cash back to the U.S. As it has been, companies have simply left their cash from doing business overseas in foreign banks. They didn't want to pay the 35% tax to bring it home. Makes sense — would you want to pay a 35% tax? Probably not...
This was OK with Obama. He viewed the tax as a cost of doing business. But there's more to it than that.
$2 trillion in cash sitting overseas is not productive. It's just sitting there. Why not encourage companies to bring it back and put it to work here in the U.S.?
Cisco has $60 billion overseas doing nothing. Cisco's CEO has said that if the company could bring that cash back, it would raise its dividend, increase its share buyback, and spend on mergers and acquisitions. He said:
I think it would [create jobs] for Cisco, but it would also create jobs beyond that... If we come back — if we were to increase our dividend — then that flows through the mutual funds, which flows through to the middle-class America, which flows through to make people feel better about their income.
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How Long Can the Trump Rally Last?
So, I like the rally in banks. And buying Cisco here is also a good idea.
I'm not so bullish on the $1 trillion infrastructure bill that Trump has promised. I mean yes, of course, this needs to be done. America's roads and bridges should be in better shape. I just question how much that spending will really help the bottom line for companies like Caterpillar (NYSE: CAT) and U.S. Steel (NYSE: X).
U.S. Steel has just about doubled since the election. CAT is up 13%.
Remember, we did an $830 billion infrastructure bill: the American Recovery and Reinvestment Act of 2009. It was a big flop, as the money that was sent to states was squandered on other things. Reportedly only 10% of that loot was actually spent on infrastructure. I see no reason to think Trump's bill would end up any differently. Because that's what governments do with cash — they squander it on pet projects and other boondoggles.
So I am not bullish on heavy machinery and steel.
And there is a downside to investing in a Trump presidency: Twitter.
Trump has gotten a lot of credit for using Twitter to win the presidential election. He spouts off pretty regularly with his instant impressions and opinions. It's not always a good thing...
Yesterday morning, before the market opened, Trump tweeted that he didn't want the U.S. government to spend $4 billion on a new Air Force 1. He thinks it's too much to pay, and besides, he already has a plane.
Now, Boeing makes Air Force 1. And yesterday, the stock opened lower by about $2.50 a share after Trump announced "Cancel order!" on Twitter. And yesterday, he told reporters, “We want Boeing to make a lot of money, but not that much money..."
I'm glad Trump wants to reel in some unnecessary spending. But don't announce it on Twitter. The last thing I need as an investor is to have to worry about Trump making a negative tweet about a company I'm invested in. How do you price that in?
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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