For the last eight years of my life, we’ve been dealing with higher taxes and lots more regulation. Like I’ve written about before, we’ve been dealing with these things for so long that we’ve forgotten what it was like not having to deal with them. And if we had elected Hillary Clinton, we would have gotten even more of the same. A few months into the Trump regime, and we have started to figure out that things are going to be very different.
And unsurprisingly, people are very happy about it.
But it actually was a surprise!
People Were Pessimistic… and the Market Went Up
I was chatting with some folks on Facebook (FB) the night of the election. One of my old Lehman friends told me to buy S&P futures limit down. I was too chicken. That would have been the trade of a lifetime.
In hindsight, it was an obvious trade. The market was worried about Trump (because Trump), but once the market started to figure out that we were going to have lower taxes and less regulation, it was happy.
For some context, the market hasn’t been happy in years. Which is weird because the market has been going up for years.
I’m serious. You have probably heard on the news that this was the most hated bull market in history. Investors were looking at the economy, which was actually pretty crappy underneath the surface, looking at all these overvalued companies and Obama’s economic policies, and said, “This market sucks—you can’t make money in this environment.”
So, people have been pessimistic for eight years, and the market has been going up for eight years.
Now People Are Optimistic. What Do You Think Is Going to happen?
Trump will enact a number of pro-growth policies (which we will talk about in a second), which could result in the stock market going down.
It is true that the stock market has done better under Democratic presidents than Republicans, even though the Republicans are allegedly pro-business. I think this is true for two reasons:
- Pro-growth policies often work with a long lag.
- Democrats generally appoint dovish Fed governors and end up with easier monetary policy.
Which is something to consider—it is nearly impossible to assemble a group of people at the Fed that is more dovish than the current group. There are two vacancies on the Board of Governors. No matter who Trump appoints, the Fed will get more hawkish.
Higher rates are unquestionably great for savers, but we won’t be getting the stock market rocket fuel like we have for the past eight years.
The contradictions here are just mind-blowing.
The Obama administration lowered interest rates to zero and only succeeded in making inequality worse—the opposite of what they intended.
The Trump administration will be viewed as friendly toward the rich, but higher interest rates will tomahawk financial assets (stocks and bonds), helping lower- and middle-class savers and making the rich worse off than they were before—and actually improving inequality.
Can you imagine what the world looks like with 2–3% fed funds? Where you can get interest in a savings account at the bank? Where you don’t need to put your money in junk bond ETFs to get yield?
Very powerful stuff.
But, as you can see, not necessarily bullish for financial assets. And so, what people need to do is to reconcile their optimistic views on Trump and the economy with the likely negative effects on financial assets.
The last eight years, it paid to be pessimistic and long—the next four to eight years, it will pay to be optimistic and short.
I don’t recommend getting naked short the market—the conviction on a tactical basis is not very high. But I think the sector rotation is going to be massive (otherwise known as dispersion), and there are some great sector bets you can put on.
This is easy.
Trump is bullish for all financials. He is going to roll back Dodd-Frank and steepen the yield curve. It’s an easy trade.
Interest rates are going up, so that is bearish for:
- High-dividend payers
Trump is bullish for energy as well.
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