No matter what your political beliefs may be, Friday’s inauguration of President Trump was a momentous historical event. Few would have believed this possible a year ago. Trump supporters expect him to be one of the greatest presidents in history. His opponents are certain he will be one of the worst. As is usually the case, the reality will fall somewhere in the middle.
As a financial advisor, I try to determine how a new president’s policies might affect my investor clients. The reality is that as government policies shift, money will move. We just need to figure out where it is moving to and get there first.
Trump will be very different from Obama. His plans to shrink government and grow American business first and foremost, will result in dramatic swings in investment options. Without making any specific recommendations, let me just share some general feelings on where I think money may likely move over the next couple of years as the Republicans control all houses of government.
Energy. Clearly, we will see more favorable energy polices as it relates to traditional oil and gas producers. This would not only benefit these businesses but would likewise hurt alternate energy developers, who may see a significant shrinking of federal dollars and assistance. Trump is a businessman who believes companies should sink or swim based on markets, not government intervention, so any industry relying too heavily on subsidies and favorable policy may be at risk.
Banks. Trump thinks interest rates are too low for a healthy economy and so we should expect continued adjustments upwards. Since interest rates are the profit center of banks, higher rates would mean higher profits.
Healthcare. Healthcare has taken a hit since the election but mostly because of the uncertainty surrounding the future of the Affordable Care Act. Congress intends to immediately tackle this problem and regardless of how it plays out, you can expect a Trump presidency to move towards a freer market in healthcare.
Industrials. Protectionism isn’t all it’s cracked up to be and there are limitations that will prevent Trump from doing all he wants, but expect him to move in some ways to shore up American manufacturers. Ironically, among both Democrats and Republicans we are seeing a resurgence in the “buy American” attitude.
Materials. Any growth in manufacturing will create a greater demand for raw materials.
Gold and Silver. With a strong pro-business president, I see no reason to hold piles of precious metals, especially gold.
Technology. Though the industry did not generally support Trump, I believe that out of necessity he will support them, and allow some of the big players to repatriate billions in foreign funds through lower taxes.
Regardless of who wins the Whitehouse, it is always a day of great opportunity for investors as money moves. Just make sure you get in front of it so it moves towards you and not away from you.
When our large family gets together for Christmas, one tradition is our Gingerbread house competition. It didn’t start out as a competition years ago, but sort of evolved into one. I know many families build Gingerbread houses but I am not sure how many do so with the intensity of our kids.
The rules of the event are quite simple. The final product must incorporate the basic house included in the kit, and the structure must stand for at least one hour. This year one couple was sadly disqualified after their beautiful Wizard of Oz house collapsed due to a poorly engineered tornado. Of course they insisted it was designed to be a moving project, but the judge’s decision was final. Over the years we have had creations that reproduced the towered “Tangled” house, the “Up” house, “Tarzan’s” treehouse and others. We have seen full scale Inca Temples and the little house of Alice in Wonderland with her arms and legs sticking out.
As the kids have engaged in this activity, Launa and I have noticed some definite patterns that have emerged over the years. Some kids (and their spouses) spend months in advance designing, engineering, and even building test models of their structures. Others show up the day of with no plan whatsoever and let their imagination run wild. Some are meticulous with detail and others are free-flowing with creativity. Some houses struggle to stay standing the required hour, while others with reinforced girders, could survive earthquakes.
In watching the kids build, I formulated what I call the Gingerbread House Theory. It is based on my observation that the way a couple approaches the project and builds their house, largely mimics the way they approach and live their lives. I have so much confidence in my theory that I jokingly told my two unmarried kids that I wouldn’t approve their future spouses until I first watched them build a Gingerbread House together.
All this comes down to a process that I have found very useful in evaluating businesses for investment. I spend significant time focusing on the principal players, learning what I can about their families, hobbies, and lives outside of the company they run. I have learned that what someone does in their spare time, how they approach activities outside of work, will be reflected in how well they succeed inside of work. Character traits and habits do not change from one area of life to another. It is no accident that potential employers often ask questions about hobbies and extracurricular activities. This is not just small talk.
If you want to evaluate a company, beyond studying the financials, use the internet and spend a little time learning about the people running it. In my opinion and personal experience, the character traits and work ethic of the people at the top, and consequently the people they hire, are the most important factors in determining the likely outcome of a business, or Gingerbread House, experience.
As one who has spent his life seeking value for investors, I find that government has a very odd way of measuring success. A politician’s success is often determined by how much government money they can deliver to their constituents. As an example, multiple articles on a retiring Nevada senator praised him for his huge success at bringing federal dollars to the state for pet projects.
As the new legislative session approaches, various special interests are issuing the common plea, “we need more money.” In a recent article on education funding it was mentioned that Utah is last among all 50 states in per pupil spending, and suggested that Utah needed to spend more. Ironically, the article also noted Utah’s high test scores, high graduation rates, and the well-known high education levels of Utah’s workforce.
It occurred to me that if Utah’s education system were a private industry, it would be receiving the praise of the nation, rather than being ridiculed for its low spending. Other states would be lining up to send their delegates to Utah to learn how to run their own systems better. This attitude is common in private industry where companies are measured by how efficiently they can produce a great product, not by how much money they spend doing so.
So why this political talk in an article on investing? It is because the winds of change appear to be blowing across the mindset in Washington. Ford’s and Carrier’s recent decisions to reinvest in America indicates people are taking notice. The traditional attitude that government success is measured by dollars spent is being replaced with a more corporate approach where success is measured by results, and efficiency in obtaining those results is rewarded. If this attitude continues, if it spreads and if it is sincere, then I believe the benefits to our nation both financially as well as socially could be enormous.
Imagine a nation where states like Utah are praised for providing one of the nation’s best educations at the lowest cost, rather than being ridiculed for not spending enough money. People may argue about what government should do, but all agree it is inefficient and wasteful. With total government annual spending at all levels estimated to be over $6 Trillion dollars, imagine the economic impact if only a few percentages of better efficiency could be injected into the system. Such an attitude would translate down to greater efficiencies across the board, more corporate willingness to invest in America and a better economy overall. The results would likely be better production, higher profits and higher wages. This would benefit investor and employee alike.
Is the stock market fairly valued at current levels? If Washington is sincere in moving government towards a more efficient model, even in the smallest way, the benefit to our economy could be substantial and Wall Street may be only beginning to reflect that.
This year BYU’s Jamaal Williams broke the school rushing record set by Harvey Unga in 2009. Crowds cheered enthusiastically as this record was broken. The sporting world is filled with many long standing records, and every year excited fans celebrate when one of them is broken. The prominence of sports in American life may well be part of the reason that investors carry into the investing world, statistical misconceptions regarding records.
As we enter 2017 the Dow Jones average (DOW) is at record highs, nearing the 20,000 mark. Some are saying that since it is at a record high, a fall is imminent. It’s almost as if they are thinking in sporting terms where records, once reached, can sometimes take years before they are broken.
This faulty logic comes from failing to understand what a market index really is. Using the word “record” for the index high, may also be creating some of the confusion. In sports, for example, records are always measured within certain limits such as yards, games, seasons, or careers. Regardless of the record, these limits create a theoretical maximum number that limits the potential record.
A stock market index, in a simple definition, merely reflects the price movement of a bucket of stocks. If the companies within the index grow, and their stock prices increase, then the index will go up. Since there is no assigned finite timeline, and no real limit to how large a company can grow or its profits increase, then there would be no upper limit on the price of the index either.
As a young investor I read a book which predicted the DOW would reach 3000 within a decade. That would have required it to nearly triple its then record high, leading to great ridicule from many investors. Nine years later the prediction came true. For some perspective, that would be like predicting DOW 60,000 by 2027.
Market indexes merely reflect economic growth. The indexes recently hit record levels partly because corporate profits are at record levels and secondly, on hopes that a new administration in Washington will be positive for that continued growth. If that turns out to be true, then over the years to come I would expect to see many more records broken. If not, then prices may come down. As in investor, do not think in terms of records, but think rather in terms of future economic potential as you assess whether 2017 and beyond will be good for investors. Then compare that potential to current stock prices. Indexes may go up or down, but it will be based on economic factors, not mere records.
There are only so many plays possible in a 60-minute game or times at bat in a baseball player’s career. But the potential growth of the US and World economies is without foreseeable limits, meaning today’s record DOW 20,000 may one day look like the record high DOW 3000 of 1991. My personal prediction however, is that Jamaal William’s BYU rushing record will last far longer than DOW 20,000.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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