Two big surprises and one expected event have taken place in the last few months; all three are positive for U.S. stocks and will attract money to the U.S. markets -- especially the U.S. dollar and the U.S. stock market.
The surprises were Brexit and Mr. Trump’s victory in the U.S. presidential election. The expected event was the rise in U.S. bond yields. All three of these events are bullish for U.S. stocks and will attract foreign money to U.S. stocks from all parts of the world.
A simple analysis tells us that this will cause the U.S. dollar to continue its rise, and it further tells us to expect more European, Asian, and Latin American money to find its way to the U.S. to enjoy the safety and security, positive capital returns, and rule of law that the U.S. brings. In addition to these characteristics, the U.S. will bring better returns now because the economic model has been changed from one focused on higher taxes and the redistribution of wealth under President Obama to one focused on the growth of economic activity and jobs as proposed by Mr. Trump.
We believe that the developed world is in the midst of a move to a more nationalistic and inward-looking focus, which is expanding to encompass ever more of the developed world. Part of this is due to the economic hardship being experienced in many countries.
When economic hardship is part of the horizon in a country, the populace will always vote for change that will diminish the economic hardship that they are experiencing. Change can take the form of higher taxes and greater focus on wealth redistribution to reallocate resources, or tax cuts and a focus on growth which will hope to lift the economy as a whole and thus increase the standard of living of all citizens.
The markets favor growth-oriented initiatives, and that is what Mr. Trump’s nascent administration is promising. The U.S. dollar and the U.S. stock market have rallied since the election, which confirms the belief of investors that an acceleration of U.S. economic growth is attainable.
We are bullish on U.S. stocks for the next several weeks. Once Mr. Trump is inaugurated, problems and obstacles will become more obvious, and doubt will begin to surface about the new administration’s ability to achieve its ambitious goals. At that time, the U.S. market will get a pullback. Until then we are bullish.
Within the U.S. markets, we favor the following industry groups.
- Banking. Not multinational banks, but regional U.S.-centric banks. Higher interest rates will improve profitability.
- Investment banking. Under a Trump administration, more mergers and acquisitions will take place, and more companies will seek additional financing in order to grow.
- Insurance. The insurance companies’ investment portfolios will be benefitted by higher interest rates and better economic growth.
- U.S. industrial manufacturers who sell domestically. The strong dollar will make exports hard to come by for multinational exporters.
- Construction and home building. Current interest rates, or rates 1% higher, will not delay housing construction, and if taxes fall more families will be able to buy homes. Slowly rising interest rates will incentivize action now instead of waiting.
- Technology. Growing companies which have come under pressure recently, such as Alphabet, Amazon which we may own for clients, as well other growing tech companies.
- Healthcare companies with visible growth.
We are not bullish on non-U.S. stocks while the dollar is rising, since U.S. investors will have to make enough return to compensate for the decline of foreign currencies against the dollar plus a positive return. We remain bearish on U.S. bonds, as we believe interest rates will rise slowly in the coming year.
Further, we see competition for cutting corporate tax rates heating up, with proposals on the table in the U.S. and the U.K.
Stay tuned, we will write more on this development next week.