Donald Trump Wins
What This Means for Stock Market & Positioning of Grow Capital Portfolios
Todd Wilson, Grow Capital Management
November 9, 2016
The most contentious, most dividing, presidential election period since…well…ever…has been decided. Donald Trump will be the 45th President of the United States. We have never been faced with a choice between two candidates with such low favorability ratings. Therefore statistically, the majority of Americans are unhappy with the outcome of this election.
In addition to the selection of Donald Trump as our next President, the Republicans’ hold of the Senate and gains in the House will have large impacts on taxes, health care, immigration policies, and federal regulations for months and years to come.
History tells us that presidential elections have a surprisingly small impact on your portfolio. “There’s no empirical evidence to suggest that who the President is, whether Republican or Democrat, should cause you to deviate from your investment strategy,” says Gregg Fisher of the investment firm Gerstein Fisher. With that being said, we at Grow Capital believe that there are tactical decisions to be made in your investment portfolio today.
What does this mean for the stock market in the short run?
The direction of the stock market has closely mirrored the change in Hillary Clinton’s probability of victory for several months now. So it was not surprising that the FBI’s announcement on October 28 to investigate additional emails found in an unrelated investigation of Anthony Weiner created a market sell-off. The S&P immediately went on a 9-day losing streak through last Friday. This was the longest stretch of losses the market had experienced in 36 years. After the FBI announced on Sunday that no charges would be filed against Hillary Clinton, the market rallied strongly to begin the week.
Historically, and not surprisingly, markets have responded much better to predicted outcomes in elections. This election remained close to the end, and as Hillary Clinton’s perceived chances of winning improved this week, the market moved up, including an impressive intra-day reversal yesterday. Hillary’s victory was essentially priced into the market.
Because the market does not like uncertainty, we would expect a sell-off of equities with the confirmation of Donald Trump as our next President.
What has been largely ignored by followers of this election is the eerie similarities between the odds placed on Hillary winning the election and the Brexit “stay” vote. Whether or not one vote confirms the other, there is clearly a strong populist movement happening globally. Trump becomes the first President-elect never to have held political office or served in our military.
Historically, the worst performing months in the stock market in the months leading up to an election where the incumbent party loses, have been January, February, September, and October. The market has been signaling a Trump victory, or at least the great possibility of such an outcome, all year. All this being said, we cannot say we are totally surprised with this outcome today.
We have been skeptical of the polling data all year, maintaining our view that the historical average of a 3% margin of error was not capturing a large number of closet Trump supporters. The people have voted for change, and change is what we will have down the ballot as well.
In the immediate term, we are most likely to see an “L-shaped” move in the equity market, as investors take time to digest the news and implications of the election of Donald Trump. A minority of analysts, including Bruce Bittles, Chief Investment Strategist and Baird, believe we may see a “V-shaped” move as Wall Street reflects on the tax cuts and looser regulatory environment that Trump supports. We are not in agreement with that camp.
Which sectors of the market should we be focused on?
There are several sectors that we are focusing on with the confirmation of Donald Trump as our next President. Grow portfolios are powered by Grow Analytics, measuring the ESG (environmental, social, and governance) ratings of stocks as represented by our proprietary Grow Score. Grow Scores have a range of -3.0 to 3.0, breaking down the individual measurements for the E, the S, and the G.
Oil/Energy: Trump has not been shy in his comments about the Middle East, stating, “I say that you can defeat ISIS by taking back their wealth. Take back the oil. You bomb the hell out of them…” Turmoil in the Middle East tends to push up oil prices, so whether Trump chooses diplomacy or military action, it bodes well for domestic energy companies. (Hess Corporation — HES — Grow Score: 1.01)
Financials: A loosening of the tough regulatory environment that Trump believes is hindering growth in our economy would bode well for the banks. (State Street Corporation — STT — Grow Score: 1.37)
Aerospace/Defense: Trump has promised throughout his campaign to restore hundreds of billions of dollars in budget cuts to our military. (Lockheed Martin — LMT — Grow Score 0.99)
Infrastructure: Trump has pledged massive spending on infrastructure, and has specifically mentioned the state of our airports, bridges, and highways in most of his campaign speeches. (Cummins Inc — CMI — Grow Score 1.41)
How are Grow Capital portfolios being positioned now that the election is decided?
Our portfolios currently hold significantly higher levels of cash than usual, especially given that we are in such a low interest rate environment. Our strategy has paid off during the last two weeks, where the S&P 500 recorded nine-straight daily declines. And we are certainly pleased to be positioned as such today. We anticipate heightened volatility and further declines in equity values in the weeks ahead. We will be prepared to put some cash to work when we feel the sell-off is over-blown. As usual, we will be thoughtful about the timing of these equity purchases, and will first seek confirmation from the market.
The Case for Sustainable Investments in your Portfolio.
The benefits of socially responsible investing have been validated by countless research studies in the academic and institutional communities over the last 10 years.
Indrani De, CFA and Michelle Clayman, CFA looked at the relationship between ESG ratings of a company and its stock returns, volatility, and risk-adjusted return in the post 2008 financial crisis, in their study, “The Benefits of Socially Responsible Investing: An Active Manager’s Perspective”.
They found a clear relationship between ESG ratings and stock returns. Higher return companies in aggregate had better ESG ratings. There was also a strong negative correlation between ESG ratings and stock volatility, and this relationship was even stronger when market volatility was higher.
This implies that investment managers can obtain benefits of diversification by selecting better ESG stocks, and that the value of this benefit only increases with volatility.
ESG reporting is becoming an even more important datapoint as evidenced by the fact that the percentage of S&P 500 companies filing sustainability reports has increased from 20% in 2011 to 72% in 2013. The SEC has signaled that they are considering the impact of making ESG filings mandatory, as they are today in Singapore.
This election was an unusual one for sure, and only the beginning of a populist movement in this country, and around the world. Be assured, Donald Trump’s election is only the beginning of the antiestablishment conversation. This is certainly not the time to become complacent about values-based investing. If Trump and the Republican party are successful in rolling back corporate regulations, the onus will be placed increasingly on us to evaluate companies based on their environmental, social, and governance scores.
This is a time to be mindful of the benefits of portfolio diversification, sustainable investments, and a partnership with a financial services company that is changing the status-quo.
We invite you to join the Grow Community today.
This report is presented by Grow Capital Management (“Grow”) for informational purposes only and should not be read as an offer or solicitation to invest in any particular portfolio, securities or investment strategies. Portfolios are for illustration purposes only and may not represent an actual portfolio. All investment programs may be volatile and can involve the risk of loss to your principal. Past performance is no guarantee of future returns. Any projected returns are estimates based on proprietary assumptions and in no way represent a guarantee of future performance. The opinions expressed in this report are subject to change without notice. This report is intended solely for the use of the person to whom it is given and may not be reproduced or distributed to any other person. This material is not meant for general distribution. The information and statistics that may be contained in this presentation are from sources believed to be reliable, but are not warranted by Grow Capital Management to be accurate or complete.
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