NOTE: I know the recent election results have produced lots of complex feels for many of us. Before reading ahead, please keep in mind that this is purely looking at the election from an investing standpoint.
Trumpty Dumpty built a big wall. Will Trumpty Dumpty cause America’s fall? The Market Says No. Alright, so he won. Hairpiece played his Trump Card and put all of Nate Silver’s 538 staff back on the job market as they watched their model crumble. Seriously, did you see this guy on election night?!? Somebody send these folks some comfort dogs. Even more astounding, after market futures imploded and triggered a circuit breaker, stocks erased losses and investors earned some serious Trump Change. Politics aside, looking ONLY on at the price action of the market and discussions with institutional investors, a Trump run executive branch and a Republican led Congress is now setting the stage for a large rally over next several years. Investors are banking on the fact that society will remain inclusive and that the rhetoric espoused during the campaign should not be taken literally. Regardless of whether the market is primed for a Trump Bump higher, as we walk cautiously into Trump’s America, an enormous amount of uncertainty has just been injected into the markets and I would tread very, very carefully.
So what is the market telling us? The price movement from last week indicates investors believe America is going to enter a period of higher interest rates, lower regulation, and protectionism. A quick summary of some of the notable movers:
· Biotech’s bounced back as fears eased around pricing regulations as well as indications there may be efforts to streamline the FDA process.
· Commercial and investment banks rose sharply in anticipation of higher interest rates and chatter (probably all it will be) to the repeal of the dreaded Dodd-Frank.
· Defense stocks ran on excitement that government spend would continue at a high rate for the industry (chart with dollar for scale).
· Promises by Trump to repeal Obamacare sent healthcare service stocks sharply lower as great uncertainty remains around the future of healthcare.
· Renewable energy suffered a major blow on concerns that government incentives for their businesses are coming to an end. Santa is bringing us all coal for the holidays.
· Technology giants traded down modestly as Trump’s rhetoric has caused concern for these names given their large international exposure.
Consumption and Taxes are key – Pain before pleasure. So I’m going to go out on a whim here and make some very bold predictions. First, I believe that the United States has or is about to enter a recession. The logic is that a large segment of the U.S. has now become extremely apprehensive and this is going to have a noticeable effect on consumption. I haven’t seen much chatter yet on the election’s effect on holiday shopping but I will not be the least bit surprised if we see softness starting with Black Friday sales. Normally, I’d be starting to panic about now if not for my second prediction that the stagnation in the economy provides the necessary ammunition for the Trump Brigade to pass through income and corporate tax breaks. With interest rates still next to nothing and expansionary fiscal policy unlikely, tax breaks are the only plausible stimulus the government will implement. And then stocks absolutely soar as private sector profits explode and consumption rebounds. Be patient because IMO pain is coming but 2018 is starting to look really interesting right here. In particular, stocks with the bulk of their current business in the US should be great stocks in the coming years as they benefit the most from tax breaks.
Now let’s finish by getting back to Nate “Noise, not the Signal” Silver. Let this be a lesson to all as it was so kindly put to me: garbage in equals garbage out. As a true believer in the power of big data and cognitive technology to solve many of the world’s complex issues, this has been a sobering reality. Perhaps I’m just frustrated by how I fell victim to Nasty Nate’s sweet visualizations and took his word as gospel. My inner frustrations currently lie with concerns that Nate Silver may have had an effect on elections. Hear me out. Nate Silver’s 538 is backed by the full faith and credit of the powerhouse that is ESPN ($DIS). 538 to some extent had a monopoly as the go-to website for election forecasting (obviously, no longer) given the strong success in past elections. So here comes the rub: if you we’re leaning Democrat and on the fence about voting in Wisconsin, Pennsylvania, and Michigan – one look at 538 or a discussion with a power user may have made you comfortable your state was already in the bag and you ended up staying home. After all, Silver had HilDog's probability of victory in each of these states at over 75%. Farfetched as it sounds, this plausibly could have been enough to tilt the scales in Trump’s favor and decide the election. Do not misinterpret this as me complaining about election results. I am merely cautioning that we just witnessed a prime example that there are limitations to what data and predictive modeling can accomplish. Taking them at face value can have large consequences.
IMPORTANT NOTE: This is not investing advice. This is pontification about the markets that we thought you might enjoy. If you would like a hot take on an issue or stock, email firstname.lastname@example.org. Please invest responsibly and thank you for playing Waylz!