As we watched the results come in, we kept one eye on financial markets. What we took comfort from is that U.S. equity futures acted as we had expected them to under the prospect of a Trump victory. That is, futures pointed to stocks declining. At their low, futures suggested an almost 1,000-point drop in the Dow Industrials Average. The drop by stocks was comforting because it follows our prediction of what would happen if Trump won. It is a comforting when the market moves in the direction you expected regardless of whether it is up or down. It offers confidence that we have visibility about what is to come.
Following Mr. Trump’s acceptance speech, futures rallied over 700 points. This also fit our thesis as we believe Mr. Trump’s acceptance speech is going to be more representative of his actions as president than his fiery comments during the campaign. This will prove soothing to markets and set the stage for a strong rally in years to come.
In our recent communications, we offered the view that if stocks did go down following a Trump victory it would be easily misinterpreted by the casual observer. We continue to feel this way. What markets are doing is simply adjusting to the new reality. It is not a precursor to a crash or anything resembling the Financial Crisis of 2008.
We expect President-elect Trump to take actions that will shake up but invigorate the economy. Volatility will become normal for a while as hedge funds, sovereign funds and mutual funds adjust to the new economic policies.
Capital is not Republican or Democrat. It acts in it’s own self interest. In the same way that water finds it’s natural outlet, capital finds its natural return. In other words, capital, or cash, is not going to sit idly at 0.5% yields when a higher yield is available. Once infrastructure spending takes shape, interest rates start to rise this capital will begin to accelerate through the economy and find its way into stocks, and loans and other vehicles that are going to offer higher yields. This will not happen later today or next week or even during the first 100-days of Trump’s presidency. But, it is important to start preparing and that is what we are doing now.
Health Care company profits will likely not be in the cross-hairs of Trump as they would have been under Clinton. So, we are focusing on increasing exposure to this sector in our managed accounts. Energy companies are likely to see higher oil, natural gas and coal prices as the infrastructure is built out. We are focusing on oil drillers, integrated oil companies and exploration companies. Materials companies involved in gold, copper, platinum, silver, etc. will likely benefit from inflation starting to filter into the economy. These are a few of the areas we are turning our attention.
Our effort to raise significant cash levels in our managed accounts, we believe, will pay off as it will allow us to take advantage of the short-term drop in stock prices. We do not want to act too quickly so we will tread lightly and deliberately as the dust begins to settle on this election.
We believe markets will settle down rather quickly as it becomes evident that the earth will continue to spin on its axis allowing for the sun to rise in the east and set in the west. Business leaders and individuals will continue to find a way to increase income and maximize profits. That is ultimately what will drive stocks higher.
Sincerely,
Kessler Investment Group, LLC