Last week in brief: Week of November 18

November 23, 2016

Stocks have risen since the election on expectations that the new administration will drive economic growth through personal and corporate tax cuts, eliminating certain regulatory constraints, infrastructure spending and shrinking government .
Could that come to pass?
Well, copper tends to serve as the canary in the coal mine for global growth. And right now, it seems to agree. After trending lower for five years the industrial metal has surged of late. Hitting 16-month highs on expectations of future economic growth.
While an analytical overview of the election is provided below, we want to quickly comment on the populist movement that has gained momentum since August 2015.

First, Brexit. Then, Trump. And now the wave of global populism may crash down upon Italy's shores. As the Italian electorate also appears ready to shrug off the status quo. On December 4th, Italy will hold a national referendum, which -- like Brexit and Trump -- also pits the will of the establishment against that of the masses.
Nor will Italy be the last. The Netherlands, Germany and even France will soon hold referendums on current governments. Potentially sloughing off the reigns of those in power and ushering in a more populist agenda.
From the moment the global media called the Brexit outcome, we recognized the parallels between Great Britain's decision to leave the EU and America's decision to decry the longstanding political establishment. It quickly became obvious to anyone watching without ideological lenses that Trump's populist message would resonate with a large faction of the electorate. A faction that cut across demographic and ideological fences. Bound together in their growing distaste for that which was passing for leadership in the nation's capital.
Here, strategy director for former British Prime Minister David Cameron compares Brexit to Trump's election victory.
While the uncertainty of a Trump presidency will continue to unnerve some, make no mistake about it. This nation was built to withstand such vicissitudes. And withstand and move forward it shall.
When Reagan entered the scene, he'd been an actor. Head of the Screen Actors Guild. Governor of California. Much of the electorate was shocked by his election. Believing him unqualified. Incapable. And yet...
Likewise, the media discounted Trump. As did the political establishment. And university elites. But the American electorate struck a resounding alarm against the broken political establishment duopoly that had achieved little for 80 percent of the nation for two decades. That failed to raise the median American income since 1999.
Trump will likely soften the hyper-regulatory environment of the last eight years. Make D.C. more business friendly. Repeal and replace aspects of the Affordable Care Act. All of which could likely, ultimately, push growth and so stocks higher.
Regardless of the election's outcome, America's tradition is to support the president elect. To enable him, or her, the opportunity to move the nation in a direction chosen by the new administration. To try to bring the country together. Heal open wounds. And provide a landscape that offers up opportunity for each and every one of us.
Despite all of the consternation extant only two weeks ago, there is now a growing consensus that a Trump presidency will be good for economic growth. For a number of reasons, it could also be good for equities.
Primary among them? Lower taxes. Trump wants to cut the corporate tax rate. As does Congress. Making it likely to happen. Citi reports that if the rate was cut to 20 percent, it would add $12 to their top-down estimate of $129 for 2017 S&P 500 earnings per share. That's a 10 percent positive adjustment to earnings per share forecasts. And a very big deal for investors.
Equally interesting are the implications of Trump likely offering of a special repatriation rate for corporate capital held abroad. With so much money offshore, repatriation could yield big dividends and buybacks that would send stocks surging.
Considering the 'Trump effect' requires a good analytic framework combined with a non-political approach. To that end, check out this excellent chart from Professor Aswath Damadaran:
Much more on all of this below.
Finally, how has all this played out in the markets?
Stocks have leapt higher, of late. With the S&P 500 topping the critical 2,200 level. Only to retest Monday's lows, then launch skyward after achieving new highs.
This has all the looks of a critical breakout level. And if it holds, the current move could lead to aggressive short-covering. Which might have the capacity to lift stocks into mid-January. As it then would become a classic "short squeeze." A scenario that unfolds when pessimists (short sellers) are forced to buy stocks in order to cover their short sales at higher prices. And that short-covering (buying stocks they'd shorted) results in a nasty Catch-22, as it sends the stocks they'd shorted markedly higher.
For short sellers, it is a painful process. One that can last a lot longer than anyone suspects. In fact, the short squeeze of 2009 lasted more than a year.
So, you'll recall some months prior when we wrote that the markets would likely stage a relief rally following the election?
We thought -- were Trump to win -- the rally would follow a brief and volatile selloff. A proclamation on which we were wrong. As the only selloff transpired in the overnight futures markets and briefly at the market open on November 9th.
Then that tune quickly changed. And markets have been rollicking since. Meaning that we may be in the midst of a year-end rally. One that could have legs into next year. Time will tell. Stay tuned...
Post Election Selection
In our missive two weeks ago (Between the Devil and the Deep Blue Sea), we recommended a handful of post-election winners and losers. Stocks that would see their fortunes tied to the policies of a new administration.
Trump won. And so here is the litany of positions we said would be helped (or hindered) by a Trump victory.
Natural Gas wins... as his campaign comments suggest he would cut back on energy sector regulations. Resulting in more natural gas exports. Helping investment vehicles like the First Trust ISE-Revere Natural Gas Index (FCG) and the companies of which it's comprised.
Financials win... as Trump would craft a softer regulatory environment for the financial sector -- as opposed to the more stringent one that would have been crafted by his opponent. Helping investment vehicles like the Vanguard Financials ETF (VFH), the iShares U.S. Regional Banks (IAT), and the companies of which such indexes are comprised.
Construction and Engineering wins... with President Trump relying on what he knows best - construction and development - to power the U.S. economy back to a higher growth trajectory. Helping investment vehicles like Fluor Corporation (FLR), Jacobs Engineering (JEC) and Chicago Bridge & Iron Company (CBI), which would likely garner rich opportunities as each stewarded mega-development projects nationwide.
Asian Investments lose... with Trump having made a number of protectionist threats. Most of which would be bad news for Asian economies and the companies therein.
Health Care Investments lose... as Trump has assured his supporters he would terminate the Affordable Care Act, steering much of the health care industry into a very uncertain state of affairs. Although a repeal and replace scenario would be much more amenable to the healthcare sector.
Alternative Investments win... as these low-correlation, absolute-return seeking investments will continue to buoy portfolios despite the trend lines of the stock and bond markets. And the fact that sit eight years into a recovery makes their presence all the more critical to portfolios.
Defense Contractors win... as both candidates have promised to rebuild the military. Which usual leads to capital flows towards the navy, army and air force. Benefiting those companies that manufacture weaponry, aircraft and ships. Helping investment vehicles like the iShares U.S. Aerospace & Defense ETF (ITA), and the companies that comprise it.
Precious Metals win... as the uncertain times that will be faced by either candidate will continue to create volatility and questions about the directions of stocks. Making disaster hedges like precious metals and PM mining companies solid bets. Helping investment vehicles like the VanEck Vectors Gold Miners ETF (GDX) and the companies of which it is comprised.
Infrastructure Investments win... as both candidates have promised to spend on infrastructure like roads, bridges and waterworks. So companies involved in repairing, building and maintaining such infrastructure will benefit greatly as the new president attempts to solve the nation's "infrastructure gap." Helping investment vehicles like the PowerShares Dynamic Building & Construction Portfolio (PKB) and the companies of which it is comprised.
You notice that many of these have already risen markedly. Look to purchase on pullbacks.
Are You Preparing for Tax Benefits?
Markets have surged on the prospect of lower corporate taxes. But a recent Bloomberg piece explains that both middle class and wealthy investors can also take advantage of Trump's proposed tax cuts. As there will be tactics everyone can utilize to reduce their tax bills.
And with many expecting the tax changes to happen next year, here is a litany of things you can do to prepare.
1) Those getting paid commissions, as well as small business owners, should defer income until January to take advantage of 2017's lower rates.
2) Retirees may consider taking no further withdrawals from IRAs and 401(k)s this year, which will lower their current tax bill and lessen the rate when they replenish cash supplies in 2017.
3) Property taxes and mortgage payments should be moved up to 2016 to maximize deduction benefits.
4) Finally, it makes sense to pay big medical expenses this year makes, as expenses over 10 percent can be written off (7.5% for those over 65).
Weekly Results
Major indexes finished higher last week. DJIA gained 0.13%, S&P 500 rose 0.94%. The Nasdaq climbed 1.64%. While small cap stocks jumped 2.33%. 10-year Treasury bond yield rose 16 basis points to 2.31%. Gold closed down $20.22 per ounce, or 1.65%.

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