The Dividend Cafe - The Craziest Election of our Lives, and Your Portfolio

Episode Date: November 9, 2016

The Craziest Election of our Lives, and Your Portfolio by The Bahnsen Group

Dear valued clients and friends, welcome to this week's Dividend Cafe podcast. We're sending it out on Thursday of this week instead of Friday because of the election and the unexpected results there and of course the market impact. We're titling this week's Dividend Cafe, the craziest election of our lives and your portfolio. And we certainly think that this whole week and this whole election cycle has lived up to that description. Are we shocked that Donald Trump won the presidency? Of course we are. I think everybody is. Our focus, though, is on the investment implications of the whole thing, not the purely political or national ramifications of it all. And so as market enthusiasts who deeply love our country, we still right now, as purposed by these communications, are focused on the investment fiduciary duties we have to our clients. And we hope you'll find this information useful.

And to the extent that it's agreeable, that's great. To the extent it isn't, we apologize. But this isn't a partisan or political or ideological discussion. This is a commentary on what we are seeing in the context of the investment atmosphere. The death of experts, it really is a fatal blow to pollsters, pundits, the prognosticator class. It isn't like there was one or two polls who slightly got it wrong. This was a systemic A to Z disaster for pollsters and the like. And I am not sure how the industry can ever recover.

for pollsters and the like. And I am not sure how the industry can ever recover. I do not believe there was a conspiracy, a thumb on the scales, or anything nefarious. I just think it was a case of systemically wrong models and overconfidence in the inputs that were determining the outputs. Maybe there's a lesson here in those who rely on mathematical models to make very important investment decisions. Yes, Fed, I'm talking to you. Cats and dogs falling from the sky. Not quite. The market ended up being up 260 points on Wednesday, the day after the election. And there was an 800-point drop in the middle of the night before that in the futures, indicating an 800-point drop. So basically a 1,000-point swing.

When you add on to the gains from Monday and Tuesday, this is now on track to be perhaps the biggest week up of the year. And you certainly wouldn't have got that impression from the media coverage. I mean, things can change. It's been a very selective rally. Certain sectors have done really well based on expected ramifications. But my point is kind of this, the idea that panicking or hiding in cash until after the election or getting out of the way and then coming back in. They're just so insanely dangerous ideas. We exist to help people avoid such thinking. The Fed, the Fed, and nothing but the Fed. The question that I'll wrestle with for quite some time is this. Does the Trump win make the Fed more likely to act aggressively in 2017, you know, to blame a tightening driven recession on him? Does it

make them less likely to act out of enhanced fear of overall economic volatility? Or are they really totally, completely apolitical? Our answer, we don't know. But if we wanted to be concerned for market volatility with the Trump win, this is the point we would focus on. for market volatility with the Trump win, this is the point we would focus on. If there is an area that I think ought to benefit the most from these election results, it is the energy infrastructure story. There's a federal government control over much of this energy world that is particular to the executive branch and the articulated commitments from the executive branch and legislative branch that we now have in this sector are really bullish. Now execution will matter, timing will matter, and other economic and commodity price issues will matter,

but all things considered, we believe the most growth-oriented catalyst this economy has will tremendously benefit. The headlines are in D.C., but the stock prices may be in Sacramento. I'll tell you, nothing is more shocking to us, and I don't mind saying, and pleasantly shocked, than the failure, the overwhelming failure, by the way, of Proposition 61 here in California, a California initiative that attempted to set price-fixing rules on the drug pharma industry, and I think would have served as a significant precedent for other states and even the federal government. Drug stocks, biotech all flew up on Wednesday as that embedded risk came out of many stock prices. So energy, pharma, and what else? Trump campaigned on a 15%

increase in defense spending. The defense in aerospace stocks flew up on Wednesday. Another area where I believe market response is justified, the sequester, compressed defense spending a great deal. We have significant foreign policy conflicts that require modernizing. NATO treaties require many allies to increase their spending. I believe we'll see improvements here and greater opportunities in defense stock names. The other space that you might add to the list of sort of bullish responses to the results of the election are in financials. Many pundits were concerned that Secretary Clinton was being forced to run very close to the Elizabeth Warren wing of the Democratic Party and therefore may carry a sort of anti-financials

agenda into office, an anti-Wall Street kind of theme. That hypothetical concern is now moot, and financials are rallying hard around that. We like certain names in the sector on their own merits, but we would caution investors that President-elect Trump also campaigned on a certain anti-Wall Street rhetoric, a populism, that may provoke him to try to earn those populist bona fides. And that may manifest itself in the financial sector. Keeping me up at night. We're basically laying out the case from a market standpoint

that certain sectors like what they expect from this new administration, energy and pharma, as we've said. And we do have a curiosity about what the Fed will do in light of a Trump presidency. But if we were to say what concerns us the most from an economic and market standpoint, it is the protectionism that Trump campaigned on. We do not know what the bite of his anti-trade policy will be relative to the bark of his anti-free trade rhetoric. And we do not know how the Senate and House will interact with him on this. The same political party, but a different ideology on this issue.

We are watching who he appoints as the U.S. trade representative. And isolationist, protectionist nationalism will have a different effect on markets than mere rhetoric. And we're not wearing rose-colored glasses. Playing in the sandbox. Because the Republicans kept a strong majority control of the U.S. Senate and, of course, the House of Representatives, the traditional need of reaching across the aisle is not necessarily the posture this new administration faces.

However, within his own party, the dynamic between a President Trump and a Speaker Ryan will have profound effects, not merely on the political climate in our country, but on market impressions of what will get done and not done. If an intra-party civil war is exacerbated, that could create ongoing volatility. The lesson from the futures market. Many of you emailed us overnight expressing understandable concerns about what you were seeing on the news and hearing regarding the futures market. With Brexit we dropped 500 overnight, ended down 900 after two market days, but then rallied over a thousand points in a week or so.

With this situation we didn't even make it to the market open until the nanosecond of insanity ended. The lesson? Please understand. It is a permanent reality that panic and drama are terrible ingredients in investment policy. I'm going to go ahead and leave it there for the week. There is a few other sections we'd encourage you to check out at dividendcafe.com. We end with our quote the week from Nehama Ben-Mosh, who is the daughter of the now deceased former AIG CEO who helped rebuild AIG after its collapse in 2008. and we find this quote from Nehemia to be just beautiful. I've given up all hope of a better past.

So we are future-oriented here at the Bonson Group, and we deeply love our community and our country and all of you. What an incredible election cycle it's been. We're glad it's over. God bless America.