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Looking Past the Hype, What’s a Trump Presidency Mean for the Markets?

Now that the Trump crash (albeit when most of us were sleeping) and the Trump rally (albeit a short covering rally) have come and gone let’s get past the hyperbole and look at some factors that will most certainly affect the markets during the next four years.

Regardless of who won the election, demographics will continue to be a major headwind pushing down GDP growth potential. Not only are the boomers aging and moving into their lower consumption years, but the larger millennial demographic have either eschewed completely or delayed the traditional move to the suburbs with a new family in tow. While there is the potential for a new baby boom, bigger than the post WWII boom it’s not a sure thing with a generation more motivated by career growth, potentially extended life expectancies and “experiences” along the way.

demographicsSource: http://www.businessinsider.com

The result, as seen below, is that our population (without immigration) is no longer growing. And the U S is not alone. Every industrialized nation plus both China and Russia is facing a shrinking population.

population-growth

While annual growth rates for the stock market and annual growth rates for GDP do not correlate, over the long run the stock market and GDP must move together. The graph below depicts the annual level of U S GDP with the Dow Jones Industrial Average. You can see that while the stock market can be volatile, it does trend to the same level as GDP. And currently, there isn’t a lot of room for the market to rise relative to current GDP.

sp-v-gdp

Source: Mitchell DeShurko, data from The World Bank and 1stock1

GDP can also increase with higher productivity, but U S Productivity growth seems to have stalled…

U.S. Productivity Quarterly/Annual Change

u-s-productivity

Source: http://data.bls.gov/pdq/SurveyOutputServlet

We’ve also seen that the worker participation rate has been at an all time low. And the trends are projected to continue for the next several years. According to the Bureau of Labor Statistics,

…the labor force participation rate declined by 2.4 percentage points over the 2000–2010

period and is projected to drop by another 2.2  percentage points between 2010 and 2020.

These two declining factors lead to a projected annual growth rate of only 0.7 percent for the

labor force from 2010 to 2020, a 0.1-percent drop from the annual growth rate exhibited in

the 2000–2010 timeframe.

Lower population growth, low productivity, and declining labor participation rates are not an economic head wind, it’s a hurricane!

And if demographics aren’t bad enough…

Let’s look at our dept and the hurricane turns into the perfect storm. Looking at the chart below you can see that about half of all our outstanding debt will come due over the next 10 years.

u-s-debt

Source: https://www.treasurydirect.gov/govt/charts/principal/principal_debt.htm

Mr. Trump has been very critical of Federal Reserve policy that has kept interest rates at historic lows for years. Even though the Fed is supposed to be independent of government policy, his stance has certainly opened the gate to future Fed rate increases.

interest-expense

Source: https://www.treasurydirect.gov/govt/charts/charts_expense.htm

Total Public Debt Outstanding: $19,805,715,000,000.00

Average interest Rate 10-16 2.216%

Interest Expense $432,650,000,000.00

10/31/2016 https://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds102016.pdf

Assuming just a 1% increase in the Government’s cost to borrow and rounding up to account for Mr. Trump’s projected deficits, adds approximately $50 billion a year to interest costs. Adding 2% and bringing interest rates to more “normal” historic levels adds $100 billion…a year. Looking at the chart below, you can see we are already spending more on interest expense than all but four other budget categories.

budget

More debt and higher interest rates mean higher interest expense as a percentage of our entire budget continues to grow and makes it harder for economic stimulus through deficit spending.

So what’s the good news?

The U S economy generated $17947 billion US dollars in 2015. That means every 1% in marginal GDP growth adds $179 billion dollars to the economy. This more than offsets the drag that will be created by rising interest rates.
While the variables are too many to really try and weigh the pros and cons of interest rates, tax policy, deficit spending, etc. there is reason to hope that at worst GDP growth accelerates at a modest rate. Over the long run, the next 10 to 20 years GDP absolutely has to grow to continue to offset the drag from higher debt, and the increasing costs of government mandatory spending. Tax cuts do stimulate the economy.

The Office of Management and Budget (OMB) estimates revenues at 19.1% of GDP for FY 2017. That’s close to the historical 19% target. Back of the napkin calculations say that if taxes were cut by 5% that would add $1.75 trillion to the economy. If GDP were to increase by just 1% as a result, the annual deficit would not increase. But $1.75 dollars added to the economy can create a lot of jobs.

While both Presidents Bush and Obama have been criticized for their deficit spending, with anemic economic results, an argument can be made that the numbingly tepid growth was just the best the economy could do. So while there are reasons to believe the combination of tax cuts and spending will give a boost to economic growth.

If so, where are the best places to invest?

Below is a heat map of exchange traded funds, showing the one week return after the election. Dark red are losing ETF’s and green those with positive gains.

heat-map

Source: http://finviz.com/map.ashx?t=etf&st=w1

Clearly international of all regions, fixed income and gold have been the biggest losers. Domestic stock sectors real estate, technology and utilities have taken it on the chin as well. Small Caps are outperforming Large Caps.

Despite the selloff of many dividend paying stocks, I still believe that dividends provide a solid source of return should economic growth not materialize as hoped. But using the heat map above I’ve focused on mid and small cap dividend payers. I also think any technology selloff is overdone. If a tax holiday is passed for foreign cash stocks like Microsoft, Cisco, and Oracle stand to benefit. And they pay a nice dividend while we wait and see what unfolds. Banking should be a long term beneficiary as there will be major revisions to Dodd Frank. But I’m a little leery of healthcare until seeing what the “replace” part of repeal and replace (referring to ObamaCare) actually looks like.

The bottom line is that the future is always uncertain. I really don’t think today is any different than any other day. Crystal balls are always misleading. But there are undeniable trends that need to be watched and accounted for.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.401 Advisor, LLC currently (12/5/2016) owns shares of Microsoft (MSFT) and Cisco (CSCO) in client accounts.Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

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Happy Thanksgiving!

I hope that this Thanksgiving finds everyone in relatively (we’re all getting older, aren’t we!) good health, surrounded by friends, family, food and beverages of your choice. While many of us have lost friends and family members that may have gathered with us in the past, or we may be suffering through our own health problems, or facing other personal or economic difficulties, Thanksgiving is a uniquely American Holiday that is all about giving “Thanks”. So might I suggest that while we say a prayer for those in need, and those we’ve lost, we focus on what we do have and what we can truly be thankful for.

I’ll start by saying a big Thank You, to all of our clients for trusting me with your investments.  Many of us have seen a lot of changes together over the years (going back to 1987), and in terms of change the future doesn’t look to disappoint. While the past never fully prepares one for the future, it does provide guidance. So here is a toast to successfully navigating through our financial futures together. And hope that there will be more opportunities then setbacks in the years ahead.

Enjoy your turkey, enjoy your family and friends and spend a few days relaxing with a smile on your face as we all have so much to be thankful for.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.
Past performance does not guarantee future results. There is no guarantee that any investment or strategy will generate a profit or prevent a loss.

Post Election Investing

Unknown to many investors, we have already had the “Trump Crash”. On election night, once it became likely that Mr. Trump would be our next President, Dow futures (an indication of market direction for the following day) began dropping precipitously. By the time I gave in and headed for bed, around 12:30 A M, the DOW was down over 800 points or pushing a 5% loss. The indication was that between the market close on Tuesday and the market open on Wednesday we would start the day with a 5% loss. Since these things tend to snowball there was every reason to believe that Wednesday would be ugly. I didn’t get a lot of sleep the rest of the night!

However, within minutes of the market open the market indices all turned positive and what followed was a solid three day “Trump Rally”.

So now with both the positive and negative over-reactions in the rear view mirror, what should we expect from here?

I’ll be putting up a longer more detailed post next week, but the short story is this:

The Wednesday night crash that wasn’t, is just typical knee jerk reaction. The worrisome part is really that it did not carry over to Wednesday trading day. The market moves so quickly due to the computer trading, the shear speed can be unsettling. The rally we’ve seen has been a “short covering” rally. In English, those that bet on a negative market can lose a lot of money when the market goes up. To close or exit those bets, the investor must actually buy the security(s) that they have been betting against. This causes a sharp short term rally. Thus the three day post election rally.

The last few days the market has been flat to slightly positive. This is due mostly to a rotation of money out of sectors that are believed to benefit least from Trump’s Presidency into those likely to benefit the most.

The trouble with buying into this rally is again the fast movement of the markets. For example the banking sector has risen over 10% in just a few days. The question is whether there is more room to run in the near term.

At 401 Advisor, LLC we are taking small steps to allocate or re-allocate portfolios. My goal is to be patient and look for values when they appear. Many technology names have been beaten up and may present new buying opportunities if this rotation continues.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.
Past performance does not guarantee future results. There is no guarantee that any investment or strategy will generate a profit or prevent a loss.

 

 

Kiplinger Webinar

The webinar I will be doing for Kiplinger.com (see last post below) is part of a Wealth-Building Web Conference Series. The cost is $29 per conference.

If you are a client of 401 Advisor, LLC or Fund Trader Pro (our online 401(k) management service) just send me an email after viewing the presentation and the $29 will be refunded via a fee reduction during the next billing quarter.

Post Election Investment Update

I will be hosting a webinar for Kiplinger.com on November 9th, after the election.

More information can be found at Kiplinger.com

Kiplinger’s Wealth-Building Web Conference Series

Tune In to Macro Trends for Investing Success

Date: November 9, 2016   Presenter: Bill DeShurko, RIA

Fast forward to the day after Election Day. You know who the next President will be. There’s going to be a lot of to-ing and fro-ing and the usual uproar about what the new Administration will do and how the markets will react.

But focusing on the din in Washington isn’t nearly as important as identifying the macro trends that actually will determine how your investments will perform over the long term.

This web conference reveals a number of lucrative investment strategies and opportunities looming on the horizon — if you know where to look for them — including:

  • Companies and stocks that are poised to profit with the rise of “the Internet of things,”
  • How to capitalize on the growing value of data and artificial intelligence in the services field,
  • How increasing freight shipments can predict a stock market rally,
  • Customer demographics that drive reliable performance in a wide range of companies, and how to spot them in an investment you’re considering,
  • And much more.

Date: November 9, 2016   Time: 1:00 pm EST, 45 minutes including audience Q&A
Schedule conflict? The presentation will be recorded and viewable on demand whenever and as often as you wish.

General Information

What: 6 can’t-miss wealth-building web conferences.
When: Between today and January 31, 2017.
Why: To help guarantee your richly rewarding future.
Where: View the presentations on your computer wherever you have Internet access.

All web conferences will be recorded. Have a schedule conflict on a live event date? No worries, view the recorded program on demand whenever you like.

Get one web conference FREE when you sign up for all six. $29 per conference — all six for just $145.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc, (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor, LLC or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Round 1

September 26, 2016

 

It’s finally here….and admit it, we can all say that we are tuning into tonight’s debate as good citizens seeking to make an informed decision this election….

donald-and-hilliary

what we are really tuning into see, is this…

nascar-wreck

What’s an investor to do? Whether one candidate “crashes” or not my investment theme remains unchanged:  “Invest in trends and strategies that are bigger than either candidate”.

From now through the end of the year my blog posts and articles will continue to focus on that theme. If volatility rocks your investments, as it likely will over the next couple of months, remember all the frantic predictions about Brexit. As the vote in Great Britain approached on whether GB should leave the EU talking heads and analysts predicted financial and economic chaos and calamity should the voters elect to leave the EU. Which they did. And I’ve yet to witness the financial chaos that was so strongly predicted. My guess is that by the end of December our markets will have reacted similarly to our own election, regardless of who wins and who crashes.

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC). Ceros is not affiliated with 401 Advisor or Fund Trader Pro. The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.
Past performance does not guarantee future results. There is no guarantee that any investment or strategy will generate a profit or prevent a loss.

Hilliary Wins

At least that is the prediction made by David Woo of Bank of America Merrill Lynch, based on the recent stock market rally. According to Woo, and as reported in this morning’s edition of MarketWatch  in years since 1944 when the stock market rose between July 31 and October 31 the incumbent or their party has won the election. In fact, based on the strength of the current rally the stock market is expecting a landslide victory (in electoral votes) for the Clinton ticket. See the graph below:

Stocks and Elections

While it might be a little early to predict the election, let alone what the market may or my not do between now and October 31,  I did find interesting the conclusions made based on a Clinton victory. Woo also predicts a split Congress based on current polling. He goes on to say, (emphasis added):

“The combination of a Democratic president and a split Congress likely means gridlock,” Woo said. “If this scenario materializes, the experience of the past six years suggests there is little chance of a major change in the fundamental economic policies of the most important country in the world in the foreseeable future.”

I have always tried to avoid political commentary, other than an analysis of how one party or the other is likely to affect our investments. I’m no dummy, I want the guy or gal that will make my job the easiest! And in this case I agree with Mr. Woo as to the end result of a Clinton victory. The question voters need to answer is whether the predictability of “more of the same” is better than the unknown risks of trying something new?

In a low growth, low interest rate future I would expect that a solid strategy will continue to be to buy stocks with high and increasing dividends. Dividend payouts should continue to grow as companies will have little motivation to invest in capital, and should instead continue to return money to shareholders.

For growth investors, we are looking to move our holdings into sectors that should see secular growth, regardless of who wins in November. For more information on which sectors, I will be hosting a webinar for Kiplinger.com the day after the election. My focus is on long term trends that are bigger than either candidate can influence with their policies.

I’ll be posting more info and how to participate in future posts.

 

New Highs, But Are We Getting Anywhere?

Once again the markets have made new highs and the media seems to forget that new highs is what the market is supposed to do. Citing the “remarkable” rally since February of nearly 20% (the yellow arrow on the bottom right to 8/16/2016 on the Chart below), the market could be showing signs of topping out. However, that is not the way to view the market.

The “rally” since February is not a bull market rally– it has only been a recovery from a selloff or bear market that started in May of last year as seen in the first arrow below.

sp500 -8162016

Source: www.freestockcharts.com

S&P 500 Index is a capitalization weighted index of 500 stocks representing all

major domestic industry groups. It is not possible to directly invest in any index.

Between the arrows the S&P 500 dropped about 15%. It then took until 7/13/2016 just to regain its prior high. Looking at the market this way we have had a very unremarkable market since May of last year – a paltry 2.3% return in 15 months. Bull markets start when the average breaks above the most recent high, and stays above that level. This paints a very different perspective of the markets new record highs.

Normally, I’d say this has been a very healthy consolidation period (a sideways market) and we should be ready to launch into a true bull market. The problem is that S&P 500 earnings have been declining, not growing over this period.  When looking at market value as a function of corporate earnings, the market has indeed become more expensive even as it has really gone nowhere on a net basis.

Bottom Line

Whether the market is overvalued or undervalued is not just a function of “record highs”. Market value is a function of corporate earnings. While the overall outlook for economic growth is not particularly promising, there are a few individual companies are managing to buck the trend. According to www.zacks.com 2nd quarter earnings and revenues were negative – but less so then 1st quarter 2016. Slightly promising, but not exciting.

While we are maintaining a fairly high cash position in our growth portfolios we continue to look for undervalued opportunities. Our dividend based strategies remain mostly invested, as we still believe any market rally will be short lived, and collecting dividends in a sideways market is a solid strategy.

 

Mr. DeShurko is a registered representative of Ceros Financial Services, Inc. (Member FINRA/SIPC).  Ceros is not affiliated with 401 Advisor.  The views expressed are those of Mr. DeShurko and do not necessarily reflect those of Ceros Financial Services, Inc., its employees or affiliates.

Past performance does not guarantee future results.  There is no guarantee that any investment or strategy will generate a profit or prevent a loss. 

Is the Market Overvalued?

Every time the market rallies for a few days the talking heads start talking about record highs…as if that is a bad thing! While “record highs” really is an irrelevant valuation metric, there are many standard ways to evaluate a stock’s or index’s fair value. One of the most common metrics is known as the Price to Earnings ratio or P/E.

Below is an article I recently published at http://www.HorsesMouth.com.

PE Article

For the entire article, click below:

Horsesmouth _ PE Valuation

Brexit…Congratulations!

I am unabashedly biased. I have thought since the beginning that 70% of the entire ECB concept was flawed…and 99.9% of the actual implementation. Here in the U. S. those of us that live in fly-over country bristle enough when Americans and mostly elected  Americans, in America (Washington DC), feel the need to control our lives. Imagine instead if all of Washington’s rules and regulations instead were handed down from a non-elected group of non-Americans, residing in Quebec or Mexico City. That’s the ECB.

For investors in the U. S. this really is a non event…except it probably strikes a little more fear in the hearts of the anti-Trump group, that his rhetoric my be hitting home in a similar fashion as Brexit was supported by the non-elite, non-financial, -non-traditional politicians in England.

Short term the markets may be more volatile. This is a case of volatility literally feeding volatility. Many trading algorithms are partly based on trading on volatility. The more volatile the market the more the algorithms are programmed to sell. Which triggers more selling. It has been heartening to see fairly stable markets today. 3% drop isn’t fun, but it has happened for far less dramatic events in the past.

At 401 Advisor, LLC we are mostly invested, but for new clients or new monies that have transferred in recently, we used this morning as a buying opportunity. I’d actually hoped for a bigger “opportunity”, but we picked up a few shares cheaper than they were yesterday.

I wrote for article on investing during volatile times that appeared Wednesday at Kiplinger’s web site.

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Kiplinger Long Term Trends


bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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