Making money off a Trump presidency

The investment world is awash in ideas:  Something big happened.  There is money to be made, maybe.  And not just in bomb shelters or food kitchens.  Somebody is going to make some real money.   Who?

I used to give investment and financial strategy advice, but I retired.  My retirement paperwork requires me not to give one-on-one advice, so I am not.  These are general observations and not necessarily relevant to any one person.   

If you want investment advice contact a highly competent financial advisor who know what they are doing.  There are many of them and you can find them on your own.   Here is who I use:   
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NY Times View:  Rates will go up, at last

1.   Interest rates are overdue to go up, so I think they probably will.   But it is a matter of controversy.  People disagree on this.  People have been talking about the Fed moving interest rates up for a long, long time.  Now I think it will do it.  Why now?   The economy is stronger and there are places where asset prices seem frothy, like real estate in coastal cities.  Plus the PE multiple on stocks is not cheap.  Again, people disagree on this, but I think PE multiples are on the high side of average, which is a way of saying that stocks are probably not a bargain.  They would be a bargain if we are on the front end of a big ramp up of productivity and earnings, but doubt this.  We need to have a recession first .

Or maybe the Fed WON'T raise rates

Action step: Sell some or all of your bonds.    If interest rates go up your bonds and bond funds will probably go down.   Think about it a moment.  If you have locked in a 3% yield in a fund of corporate bonds and interest rates go up one percent, then your 3% isn't as good as the new rate of 4%, so a new buyer would only buy your bond at a discount so that she gets 4% which is the going rate.  So if you have $100,000 in a bond fund of ten year bonds it would fall to maybe $90,000 if rates went up one percent.   So watch out with your bonds and bond funds.

But wait, you might be thinking: it rates go up won't I start getting 4% instead of 3% and isn't that good?  No.  Remember, you locked in 3% and it is only new buyers who use fresh money who get the 4%, which they get because they bought off of you or someone like you at a discount.   Selling at a discount is what you are likely trying to avoid.  And if you hold you are holding a 3% yield in a 4% world.

Note:  if that explanation seems strange or hard to understand, don't worry.  You are in good company.  But it also means that you need a financial advisor.  There is no shame in getting help or advice.  

   Action step:   Sell some or all of your stocks.  If interest rates go up your stocks will have a major headwind.  In a world of 1% and 2% interest rates the value of your stock dividends and the value of future dividends look really good in comparison.  As rates move up the value of future earnings look less attractive so the value of the engine of those future earnings (the companies represented by the stocks) go down.   Think about it.  In a 10% interest rate environment a $1,000 check payable in a year is worth about $9,100.  $9,100 times 10% is about $900, so $9,100 plus the $900 is $1,000.   But in a 1% interest rate environment a check for $1,000 in a year is worth about $991, because  $991 times 1% is the measly $9 interest.  And $991 plus $9 is your $1000.   So, the value of some later check or later dividends goes up if the interest rate environment is low, and down when it goes up.

A New Yorker cartoon is not available to show here, but to summarize it:  two people are watching TV news and the announcer is saying, "The stock market fell on news that a giant astroid is aimed at the earth and will smash it to smithereens next Friday, but the market rebounded on news the Fed is lowering interest rates."

Will some companies or industries do better than others?   Yes.   Trump may well get through a deficit busting infrastructure bill like the one Obama tried to do 8 years ago but got blocked by the GOP in Congress.    The Republican strategy was to deny Obama any "victory" so that he could be blamed for the gridlock and weak recovery.   The strategy was politically successful in injuring Obama and bringing a Republican majority to both houses of Congress and now the White House, although it came at a political price of causing Republican voters to keep the party label but re-define the Republican party from a small government party to a populist party, thus marginalizing the authors of the successful stop-Obama strategy.  (This is that split in the GOP, which may stay split or may not.  We will see.  If Trump chooses Romney as Secretary of State it means to me that Trump is becoming a conventional Republican, not an insurgent.)

Expect construction and heavy equipment companies to do better:  Caterpillar and John Deere, plus companies that make the raw material of construction, like Montana Dakota Utilities, MDU, which owns aggregate and cement construction facilities.   

Fox News: Bank regulators are the political enemy

Bank deregulation.  Banks may well get relaxed regulation if Dodd-Frank is repealed or revised, and if Elizabeth Warren's Consumer Financial Protection Bureau is scaled back.   Trump said he wanted less influence from Wall Street and the special interests but he also said he wanted to scale back regulations.  Banks tend to prosper under lighter regulation right up until the time they explode.  It is not clear what Trump really wants but it is clear what the conservative media and the Republican congress wants: reduce bank regulation. 

The move in bank stocks has already happened.  JPMorgan and Citibank and Morgan Stanley and the rest of them have moved up some 10-15% in the three days after the election results came in.  

This is a mixed bag for investors.   Banks who are careful with their lending do worse than bolder banks during times of expansion so investors and boards of directors wonder why the stick-in-the-mud underperformers aren't doing better.  The history of savings and loans in the 1980s and hedge funds in the 1990s and commercial and investment banks in the 2000-2008 was that they competed to do riskier and riskier lending to keep up with their peers until the bubble popped and they all went on taxpayer-life-support.  Remember the Savings and Loan Crisis?  Then the Long Term Capital mess?  And, of course, the crisis in 2008 when GE, AIG, and a bunch of banks all needed emergency bailouts. The good news for owners of bank stocks is that Trump may well be ushering in a new growth cycle, taking off the restraints.  This may loosen up lending and help banks be more profitable (and more risky.)   The bad news is that history suggests that the growth cycle ends badly.

Drug Stocks.   The assumption is that they will experience lower regulation and they will prosper.  This assumes that whatever happens with health care--repeal and replace Obamacare, plus Medicare and Medicaid--will not reduce payments for drugs.

Summary:  Aren't there some clear and obvious really good things to buy in light of the dramatic election results?   To my mind, no.   The big thing that will affect stock and bond prices is whether the economy goes into recession--which is overdue--and what the Fed will do.  Both Trump and the general GOP establishment have been critical of the Fed and their zero interest rate policies, saying they were helping Obama by inflating asset values unfairly.   I expect the Fed to raise interest rates and the effect of that will dwarf the other things happening.