Barron's Streetwise - Trump’s Big Win Fueled a Market Frenzy. What Comes Next?

Episode Date: November 8, 2024

Keith Lerner from Truist on the merits of Trump trades. Plus, examining major upgrades on Peloton and Roblox. Learn more about your ad choices. Visit megaphone.fm/adchoices

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One, you've had above-average returns under each president, even though policies have been different. Hello, and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard is Keith Lerner. He's the chief market strategist for Truist. That's a North Carolina based investment company. Remember the old BB&T and SunTrust banks? They merged and it's now called Truist. And Keith is going to talk to us about Trump trades and the wisdom or lack thereof of following them. This, of course, in the wake of Donald Trump's resounding election win. We'll get into that and later we'll say a few words about a couple of

bold stock upgrades on Wall Street. Maybe too bold. You can judge for yourselves. Listening in is our audio producer, Jackson. Hey, Jackson. Hey, Jack. At what time on Tuesday night, or was it Wednesday morning, did you know which way the election was going? I think immediately when Florida came in, I'm on the West Coast. So this is the first election in a while where I've had results come in, you know, not super late into the night. And I just kind of saw the margin was Trump plus 12 in Florida. The polls had him plus six. And, you know, you do the math with all the other states and it doesn't

seem like it's going to be close so some of this stuff like the statisticians know how to go county by county and compare the margins with previous elections and you know what i do is you can flip back and forth between the news channels that that sort of lean in different directions and one starts to look like a party and the other starts to look like a funeral. And that usually tells you before they really said what's happening. And for me, that was around 9 p.m. on Tuesday. Things happened fast. This was a pretty convincing win. And at the time of this recording, Donald Trump has won the presidency. Republicans have the Senate. They do not yet have the House, although it kind of looks like things might be headed in that direction.

It is, as they say, too early to call or too close to call. One of those. But we could end up with a red sweep, red wave. Do you think our listeners want to hear us do a postmortem of the election where we talk about how our own political priors lined up exactly with what happened and what the party should do in response? Good God, man. Under no circumstances. First of all, I don't know what a political prior is, but I'm devoid of them. I don't do politics. As I've said many times before, that makes me break out in itchy rash. And no, I don't think so.

I do want to talk about this subject of Trump trades. I have heard lots of discussion in the weeks leading up to the election of what should investors buy or sell depending on who wins. We even touched on it a little bit on this podcast. I'm always skeptical of election based investment strategies, but I think it's fair to say this is a departure from the norm in American politics. I think that Trump's fans would say that, and I think his critics would say that. And I think there are investors out there wondering if we see some approaches to policy

that are much different from what we've seen in the past, what's that going to mean for my portfolio? Should I do anything to capitalize on that or protect myself from this or that movement in financial markets? And that's what I want to talk about. We also saw big market moves. The stock market has voted and the stock market has said, we think this is going to be good for businesses and the value of businesses and profits. It's just a one day vote. There has also been some meme action, DJT, that's the ticker of a company called Trump Media and Technology Group.

Some people might take issue with my characterization of this company as a, this stock is a meme stock, but I say that only because there's not a lot of money being made that I can see. And there was a huge spike after Trump's election win, and then the stock kind of faded. But at one point, the company was worth more than $9 billion. Trump himself has made billions of dollars off of his stock holdings. It's just hard to point to any traditional measure of economic size that makes that market value make sense. But it had a heck of a jump after the election. Let me give you one quick example of why I think it's difficult to invest based on politics. Would you say, Jackson, that a Trump presidency is good or bad for energy stocks?

I'd say good. Good. I think that's what most people would say. And you can look at something like the Vanguard Energy ETF. That was up 4% on Wednesday. I hear that phrase a lot from Trump supporters, drill, baby, drill. We've got something in the way of drilling all the oil that we need, and we're going to get rid of that something that's standing in the way. We're going to open up drilling. But that leaves me with some questions. For one thing, U.S. oil production is at record highs, not just record highs for the U.S., but record highs for any country ever. We're like the Saudi Arabia of oil.

ever. We're like the Saudi Arabia of oil. Well, the Saudi Arabia of oil is Saudi Arabia. But we're like the US of oil and we're bigger than Saudi Arabia. I'm looking now at the price of Texas crude and Brent crude. They're down 11% and about 14% over the past year. And that's because oil is expected to be in a bit of a surplus next year. It's not just the production. The outlook for demand is a little sluggish. A lot of it traces to economic weakness, especially in China. So I'm not clear on how drill baby drill would be helpful to oil company investors. We've had oil company CEOs in this podcast who have told us that what investors really want is discipline on production. More of a drill judiciously, baby.

That's a terrible slogan. This is why I don't run for anything. Now, drill, baby, drill would surely bring down the price of gasoline, and that would make plenty of voters happy, and maybe that's more important than keeping investors happy. But the price of regular gasoline was recently at an average of $3.23 nationally. That's down from that brief pandemic spike to over $5 a gallon. brief pandemic spike to over five bucks a gallon. Remember the roads were empty and everyone brought down production and all of a sudden roads filled up again and the price of gas skyrocketed. So if we've come back down to 323, 324, what's normal? Over the past two decades, about three bucks is the average price of gasoline. That is not adjusted for inflation, so where we are right now is pretty normal on the gasoline price. Now, maybe Trump's second term will be great for energy stocks, just as investors

are betting. I'm just saying it's not a slam dunk. It isn't that clear to me. Also, long-term energy sector returns have been kind of blah. That Vanguard ETF, it's returned 50% as a total return over the past decade. You've made exactly five times that much if you just held an S&P 500 fund. So I don't see any burning need to load up on energy stocks now. Let me give you one other quick example. One thing I hear from most financial strategists right now is, well, we'll probably get some deficit spending and that might be inflationary and that might cause bond yields to rise and prices to fall. So watch out there.

Treasury prices have been falling, pushing yields higher. The yield on the 10-year note is now up more than eight-tenths of a percent since mid-September. Now, we are sure to have big deficits next year. We were going to get that no matter who won. And maybe Treasury prices have further to fall, but here's what the rates team at Macquarie wrote right after the election. We'd be mindful of pushing the U.S. Treasury yield story much further, though. If there's a surprise coming from Trump in the next few months, at least relative to hyped up expectations, it will be about fiscal restraint rather than fiscal irresponsibility. When the market realizes this, long-term U.S. treasury yields could stabilize

or decline. I'm not betting on fiscal restraint. I'm not quite ruling it out either. The thought in the back of my mind is if one party runs the show, then that party is on the hook totally for what happens. No one wants to own a bond market temper tantrum. You get to choose what policy you carry out. You don't get to choose whether bond investors revolt. So I know that we have heard about Trump getting rid of taxes on this or that, you know, overtime and tips and social security and maybe getting rid of income taxes altogether. And I'm just saying, don't be surprised if the new administration tries to carry out

its policies with some regard for how the bond market responds. Those are just some quick thoughts. We'll have more to say down the road. Keith Lerner over at Truist has done some research on this subject, how asset classes have responded in the past to different administrations. Some of his findings are surprising, and that came up in a conversation I had with Keith just after the election. Let's hear part of that now.

People looked at this being very close, you know, 50-50. We wake up today. We may not know for days or weeks. So all of a sudden, you go from, hey, this is going to drag out, till we have clarity and the market pops. And historically on the elections, maybe not the same day, but normally as you move past the elections, regardless of the outcome, you get a sigh of relief because you get some clarity. And then on top of that, now that we have clarity, you had at least on the margin more of a red wave than was expected. That means the perception,

and we can talk about reality and how much it matters, but for today, perception is stronger economic growth, higher inflation, and potentially lower taxes. You put this all together, where do I want to be? I want to be on things that are leveraged to the economy, You put this all together, where do I want to be? I want to be on things that are leveraged to the economy, small caps. I want to be more US-focused because tariffs are coming, so I'm going to sell off Mexico and China. And then you see yields rising on the deficit spending economy inflation. So that somewhere makes sense about the playbook. Small caps also have underperformed a lot this year.

So I think people have been looking for an excuse as far as also like, you know, catch-up trade. Obviously, people have drastically different feelings about what happened in the election. Some people are related today and some people are crushed. Among the people who maybe didn't want this outcome, they say, well, look at what we've been hearing on the campaign trail. There's going to be this or that drastic action. And then an investor out there might think, well, drastic markets don't like drastic. Maybe something's going to happen here that'll rattle markets. But I also kind of feel like no politician wants to really own a severe stock market decline or a bond market blow up. So maybe what we see in terms of policy won't quite match the sort of fiery phrases that we heard on the campaign trail.

I mean, do you think that that's a fair assumption, that the administration going in, watching financial markets, doesn't want to do anything that would create too much chaos? I think there's two things that provide some restraint. One is what you just said, that financial markets, don't forget, it's not gonna be that long before we're talking about midterm elections, and either candidate doesn't want a recession in the first or second year of their presidency. So I think that's one part of it. I also think the bond market at some point, not today, could also provide some constraints on how much can be done. And the other argument along with this is, yes, maybe this was more of a red wave than expected, but the House is still a bit of a toss-up, even though it appears to be leaning red.

And even though you have maybe more of a Republican tilt, you don't have huge margins. And there's also divisions within parties still. So it may still be difficult to get transformational type policy done. I think there is some natural checks and balances from what we discussed as far as no one wants a recession. There's still some division, even if the Republicans have a full sweep, which we don't know yet. And the bond market will also have posed some constraints also. And on the knee-jerk reaction, I think the market is focused on lower taxes, lower regulation. I will say, I do think some of these other things will come up.

I don't know when, but the tariffs and just more wider outcomes on policy. Today, the election matters more than anything. We see that in the response from the market. But as you go out three, six, 12 months, other factors will matter. The business cycle still matters. What central banks are doing around the globe, Middle East tensions matter. Profits of technology stocks will matter. The business cycle still matters. What central banks are doing around the globe, Middle East tensions matter. Profits of technology stocks will matter. Why do you favor large caps over small caps?

I hear from some people, they say, well, large caps in the US have done great, but they look pricey. Therefore, tilt towards value, tilt towards overseas, tilt towards small caps. You still like large caps. Why is that? We've been advocates of large cap and we've been advocates of tech. And the biggest difference between these indices is large caps have a lot more big tech. And if you look at the thing about small caps, they have more financials,

they have more industrials as well. So on a short-term basis, I actually think that small caps will likely, they're having a pop initially. There's likely more to go because there's going to probably be more of a year-end chase as well. But the reason why we've stuck with large caps is that one, we still believe that the AI cycle is real, that we're still somewhat early in that cycle. Normally in a bull market, there's a theme and the theme of this bull market has been AI. Profit trends are stronger there as well. So we still like tech and the profit trends are there market has been AI. Profit trends are stronger there as well. So we still like tech and the profit trends are there. On a short-term basis, I do think, as I mentioned, that small caps likely outperform. So we're more neutral overall,

but timeframes matter. The big reason why we've been overweight in large caps is the earning trends for large caps have been much stronger than small caps. So large cap trends going up, small caps moving sideways. And then thirdly, interest rates, small caps have more variable debt. So as rates are moving up, they get hit more than large caps. So what you're going to see, again, short-term, there's a kind of a catch-up trade, but I still think this tug of war between, okay, maybe the economy is getting a little bit better, but that means higher rates and that could hurt small caps more. But again, short-term playbook, probably small caps outperformed for a bit longer here.

Don't overly mix portfolio and politics because again, you and I are talking today short-term and we're seeing things very directly based on what's happened in Washington. When we look under the last three presidents from Obama to Trump to Biden, the market returns and sector returns may surprise investors.

One, you've had above average returns may surprise investors. One, you've had above average returns under each president, even though policies have been different. The top one or two sectors each time has been tech because that's where the innovation is under all presidents. And then the last time that we went through this, a lot of folks said when Biden was elected that the worst sectors would be energy and financials because of regulation and other factors. And guess what's been the strongest sector since Biden's been in office? Energy's been number one. Financials have been three. It's because of other factors and the starting points of the pandemic. I realized that. And also like coal has greatly outperformed clean energy, which was everyone was saying when Biden got elected,

so what I'm saying now that Trump is elected and we all have an impact, especially short term, but there will be other factors that play into this and the conventional realism has not been spot on longer term. So again, use it in the overall analysis, but don't use it in isolation is the main takeaway on the election results. Thank you, Keith. Let's take a quick break. And when we come back, Jackson's going to talk to us about how he voted and share some talking points on political theory. That's, oh, I can't wait. We wouldn't let that happen. We're going to talk about a couple of stocks instead.

Welcome back, Jackson. Do you have a Peloton bike or any kind of exercise machine where you live? I did a free month of ClassPass last month. That's a birthing class? Is it ClassPass or ClassPass? No, no, ClassPass. Is it clasp pass or class pass? No, no, class pass. You get to go to a bunch of different workout classes that are offered by different companies. So I got to survey a whole bunch, including stationary bikes.

I went to SoulCycle. How was that? It was maybe more like intense than I thought it would be. Kind of with the music and is, is almost like a religious service was my impression. Well, soul it's got soul right in the name. I guess I should have known.

All right. Well, I'm glad you had some good workouts. I have the world's loneliest Peloton machine in my home. I can't remember the last time I used it. There might be family members using it. I don't know. I don't want to speak for everyone. How many t-shirts of clean laundry that you haven't quite put away yet are folded over that bike? Okay. So it's clean. None. We, we, we use the treadmill

for that. It has a much bigger screen. A Peloton has been losing some business and the stock has been hit hard but it did catch a recent upgrade on wall street i guess a double upgrade meaning that b of a securities upgraded it from underperformed straight to buy i want to talk to you very quickly about that and about roblox which also got got upgraded by Morgan Stanley. That was to overweight from equal weight. Last time I did the math, B of A was looking for about 20% upside for Peloton stock and Morgan Stanley was predicting about 30% for Roblox. I view both of those as pretty bold calls for different reasons. Maybe a little too bold for my taste, but you can judge for yourself. Let me run you through it.

So Peloton's main problem seems like a significant one for a subscription business. Its subscriptions peaked in the fiscal year ended June 2023. Then they fell by a fraction of a percent last year, and they're projected to fall by more than 5% this year. Also, the company is feeling the burn, as in free cash flow is negative. It's easy to view this company as a pandemic winner that's now fallen on hard times. I guess that's what it is. The stock was over $150 a share during the pandemic at one point. Now it's down to single digits. There is a new CEO who starts January 1st. His name is Peter Stern, and he led software services at Ford and at Apple. He helped start something

called Apple Fitness Plus. So he knows a thing or two about the intersection of health and screens and subscription services. Peloton has also been cutting costs. Wall Street reckons that it will swing to positive free cash flow this fiscal year, about $110 million. There are some other clues that B of A likes. One is that Peloton seems to have room for more cost cutting, including by reducing headcount. If you look at subscription revenue per employee, it's way below peer levels. Peloton used to do its own manufacturing, but it doesn't anymore.

So maybe there's room for lower costs and that would unlock more free cash flow, which would allow for debt reduction and lower interest payments. That's what we call a virtuous cycle. It's got to be something there that you could start a competitor to SoulCycle called Virtuous Cycle. How would it work, Jackson? If you're a horrible person, your pedaling

generates electricity and that gets routed to someone else's house. You do that as a nice thing for them. They get free electricity from you and that helps you atone for your wrongdoing. Virtuous Cycle. Instead of extremely loud dance music, you have Gregorian chants. Trademark that quickly, please. Okay, so all of this is good for Peloton, but what you really need is some growth. And there's only kind of some vague opportunities there to go on. One opportunity is men. There are only about a third of subscribers, but the mix is rising.

Is there a way to get more guys to win for Pelotons? I don't know. The other opportunity is in treadmills. That market is about twice as large as the exercise bike market, and Peloton has made only limited inroads, so maybe it could do more with treadmills. Also, distribution. Costco is selling Peloton bikes for the holidays. I think you save a few bucks if you do some of the assembly yourself. I don't quite know,

but that's a good new chain for Peloton to get into. So I would call that a cheap stock, but really still a declining business until new management does something to get subscriptions growing again. I guess I'd rather wait to see what that something is and how it works. And that stock is unpopular at last count. Let's see, there's 22 analysts who cover it. Only four of them say to buy. So when I say that call seems bold, that's what I mean. It's going against the grain. Now the Roblox call also seems bold to me, but for a different reason. That stock is popular. 34 analysts who cover it, about two-thirds of them say to buy.

So it's not particularly novel to put a buy recommendation on the stock. But there's the Hindenburg report. Does everyone remember Hindenburg? I think we've talked about them on this podcast. It's a short-selling firm. They bet against the stock, then they come out with a report to tell you what a bad company or bad stock it is, and the idea is a sour public mood on the stock, and maybe it goes down, and maybe they make money. So it's a pretty self-interested thing to do, but there have been enough cases where they've been right about stocks in the past that investors at least take notice when they put out a report. Hindenburg put out a report on Roblox on October 8th, and it was a doozy.

It accused Roblox of inflating key metrics and being a pedophile hellscape for kids. That was just in the title of the report, by the way. The title is Roblox, Inflated Key Metrics for Wall Street and a Pedophile Hellscape for Kids. Roblox strongly disagrees with that characterization and has put out a response. I'll come to that in just a moment. Roblox doesn't think of itself as a video game company. It calls itself a human co-experience platform. One important thing to know is that the games or the worlds on Roblox, those are built by other

users. The money the company makes comes in part from purchases of an in-game currency. Revenue is expected to hit $4.3 billion this year, up 24%. Hindenburg says the company is unprofitable, which is technically true if we're talking about paper profits. But if we're talking about free cash flow, that's expected to approach $600 million this year and multiply to about $1.5 billion three years from now. It's a pretty common thing for fast-growing software companies to have free cash flow that greatly exceeds their paper profits. Okay, so back to Hindenburg. One claim that it makes is that Roblox's daily average users overstate the number of people who are using the platform. It writes in its report, Roblox forums detail how users regularly have

dozens of alternate accounts to farm for goods on Roblox, avert bans, and increase their follower counts, among other reasons. Now, Roblox's response is basically that it has spelled out the shortcomings of its daily average users measure in its annual report. Here's one line from its report. Here's one line from its report. Because DAUs measure account activity and an individual user may actively use our platform within a particular day on multiple accounts for which that individual registered, our DAUs are not a measure of unique individuals accessing Roblox. Seems pretty straightforward.

Hindenburg also points to no end of deeply troubling content and behavior in games that are populated by kids. Remember, this is content that is generated by other users. Roblox says that it has a, quote, robust set of proactive and preventative safety measures. So what does Wall Street think of Hindenburg's report on Roblox? Not much, apparently. Roblox stock isn't quite down as sharply as Peloton, but it does sell for less than half of its pandemic high price. It's notable, however, that the stock is up about 20% since just before October 8th when the Hindenburg report came out. Hindenburg's reports can sometimes send the stocks it targets tanking. Not this time. Roblox stock is up quite a bit.

So I guess what makes that Morgan Stanley upgrade bold to me is that it comes right on the heels of that Hindenburg report and at a time when the stock is selling for a lot more. So what gives Morgan Stanley's analysts such conviction on the stock? He writes that the company has reached an inflection point marked by, quote, accelerating share gains as it reaches larger slash more diverse audiences across more platforms. Well, more platforms, this is historically a game that kids play on mobile devices, but there's a small but fast-growing share who are playing the game on PlayStation video game consoles. Okay, so more platforms. What do they mean by more diverse audiences? The growth numbers for Roblox include a rising mix of over 17-year-olds.

Morgan Stanley's analyst says the company is, quote, successfully aging up its user base. As examples of recent top earners on the platform, he cites an NFL football game and a shooting game called Rivals. Now, whereas Peloton is cheap with no growth, Roblox has plenty of growth, but it's trading at a price that some might find pretty expensive. Morgan Stanley's case is basically that the company deserves's trading at a price that some might find pretty expensive. Morgan Stanley's case is basically that the company deserves to trade at a pretty good premium of adjusted earnings, and that if you project those adjusted earnings out a couple of years and you put a premium on that, you end up with some good stock upside from here. We will see. The company does cite some risks for Roblox, and one of them is the potential for negative

press over safety concerns. Another one is the spread of artificial intelligence in game development. Just as AI can build text or pictures or videos in seconds, it can be used to generate new worlds in video games. If you're Roblox, you'd better figure out how to give your users a way to harness that power before your rivals do. And that is Roblox, MPeloton and some Trump trade stuff. I think we've got it covered. What do you think, Jackson? Anything else? Well, we talked about the stationary workout machines at your household. I'm curious to know, have you ever been to a group workout

class? It has been a little while. I'm going to say it was like 15 years ago. All I remember is, first of all, a lot of pain, a lot of pain in the haunches afterward. And the bikes are really super close together and everybody in the room was better at it than I was. And they have these eucalyptus towels that they have in the fridge afterwards. They had a sign at SoulCycle that said, please do your laundry and wear deodorant. So similar situation. I didn't make that up. Those are fair tips and it's a good place to leave it. Thank you all for listening.

Jackson Cantrell is our producer. As he always says, how does the poster go again? Please do your laundry and wear deodorant. You can subscribe to the podcast on Apple Spotify. You can review it. You can tell your friends. You can send us a question if you'd like to hear it answered on a future episode. Just tape it on your phone, the Voice of Memo app.

You can email it to me, jack.how. That's H-O-U-G-H at barons.com. See you next week.