Embrace the Red Wave or Go to Cash?

Joe Franklin
November 26, 2024
Economies, Finance, Funds, Investments, Media, News, Stock, Taxes, The Market

“I’ve thought a lot of things when I’m managing money with great, great conviction, and a lot of times I’m wrong. And when you’re betting the ranch and the circumstances change, you have to change, and that’s how I’ve always managed money.”

– Stanley Druckenmiller

I remember hearing about Trump being shot in July, running upstairs and sharing with my wife, Jennifer. Many were thinking about what might happen if the assassination attempt were successful. We were talking about potential Civil War, and many were inspired by the immediate “Fight, Fight. Fight” reaction and iconic photo that captured the moment.

After the shooting, we could start to see a rotation in the markets from the previous market favorites of big tech and big money center banks toward companies that would benefit from a Trump presidency. Many were anticipating that his survival and fighting spirit would usher in a Trump presidency. Stanley Druckenmiller was one of the more vocal well-known money managers who had quite a bit to say about what he expected going forward:

“In a red sweep, I think you get animal spirits in the business community. You get deregulation and there might be some sort of uplift relative to where they were in terms of the business community,” Druckenmiller said. “So I think the economy could be potentially stronger for three to six months.”

“The only fear is because the bond yields do not reflect a proper economic outlook, there could be a bad response from the fixed-income markets, which could then snuff out the equity rally.”

The graphic below details what we feel will benefit and what will go out of favor during the upcoming Trump presidency. The major themes affecting portfolios are:

1) Energy Independence, 2) Tariffs & Lower Taxes, 3) De-Regulation & Elimination of many government contracts, 4) Make America Healthy Again Initiatives, 5) Free Speech Initiatives, 6) De-Escalation of Wars, 7) Libertarian Monetary Initiatives, & eventually, 8) The Inevitable Economic Slowdown we’ve all been waiting for as we cut government spending and tighten our belts.

TRUMP’S FIRST WEEK AS THE 47^TH PRESIDENT

Newly elected president Trump is widely expected to initiate “mass deportations” of illegal immigrants, expand oil drilling to re-institute U.S. independence – bringing pipelines back online, & negotiate peace deals / impose sanctions to de-escalate wars around the globe.

These actions are expected to be very positive moves for energy service companies, pipelines, and nuclear energy. Foreign energy concerns, oil tankers, and alternative “green” energy companies are expected to not do as well.

Likewise, defense stocks will likely not do as well with Elon & Vivek’s Department of Government Efficiency looking to cut spending at the Pentagon and the expected de-escalation of wars around the world. Peace around the world may also allow more capital to flow to foreign countries around the world. This combined with a weaker dollar spurred by lower interest rates in the U.S. may stimulate emerging markets much like they did in the early 2000s when we transitioned from the Clinton dot.com era to the Bush early 2000s era.

THE DEPARTMENT OF GOVERNMENT EFFICIENCY

Javier Milei’s “chainsaw” economic policies in Argentina gave us a taste of what is likely to come about with D.O.G.E. at the hands of Vivek Ramaswamy and Elon Musk. Even many long-term Trump haters are cheering on their plans to overhaul spending at the Pentagon and other sacred cows. We have not had a balanced federal budget since the Clinton Administration, and many are excited at the prospects of tightening our belts to rein in spending and debt. It may hurt for a while, but most understand that making the government keep to a budget will be good for us all in the long run.

Elimination of government contracts will likely hurt defense contractors and big tech companies. AI and growthy technology stocks may peak and come back down to earth as government stimulus wanes, much like the dot.com stocks peaked and busted in early 2000 at the end of the Clinton era.

Many remember the dot.com bust ushering the painful era of the 2000s and like to refer to it as the “lost decade”. For those who failed to diversify outside of the S&P 500, this was definitely the case. But for those who repositioned for the new era of less regulation, less government stimulus and new policies of a new administration, the 2000s was still profitable. “Mom & Pop” small companies are likely to fare much better under less regulation. For those who do not remember the early 2000s, the chart below shows how smaller, less popular companies fared. Keep in mind, this was all happening while the big technology companies represented by the Nasdaq 100 lost over 80% of their value.

LIBERTARIAN MONETARY POLICIES

Blockchain, cryptocurrencies, and the companies that are taking advantage of these technologies have been some of the biggest winners over the last few months. The election results accelerated this trend.

Some of the biggest winners to date have been Microstrategy, Coinbase, Hut 8 Corp, Bitcoin, & Tesla. These companies are up 568%, 75%, 94%, 122%, and 42% year to date and 89%, 64%, 67%,43%, and 46% just since the election.

Blockchain technology has been under fire from the Biden administration but is wholeheartedly embraced by the new administration with Elon and Vivek, two of its biggest cheerleaders. Musk named this new government division after the DOGE cryptocurrency. With these two in charge, we are unlikely to see further adoption of a Central Bank Digital Currency like what the Chinese Communist Party started to put in place in Asia.

Vivek and Elon are championing more libertarian monetary policies embracing decentralization, privacy, inflation resistant stores of value, and unconfiscatable assets. This is what makes cryptocurrency so popular. In addition to this, blockchain technologies are slated to save banks over $120 Billion a year as over 90% of banks are rushing to adopt this technology.

We are currently in the 2^nd year of a 4 year Bitcoin halving cycle. In the past, Bitcoin has bottomed approximately a year to 18 months before it’s halving and topped a year to 18 months afterwards. The most recent halving was approximately 7 months ago. If Bitcoin adheres to its past cycles, it will top somewhere between 5 months to a year from now and has given us manic blow off tops in past cycles.

Bitcoin is still currently undervalued if valued using a common valuation model used for commodities like gold and silver. In comparison, Bitcoin was trading above its “Stock to Flow” valuation at this time in November of 2020.

The chart below shows how Bitcoin has performed during its up cycles going back to 2012. We are unlikely to see the peak for this cycle until May of next year.

MAKE AMERICA HEALTHY AGAIN

A Department of Health and Human Services run by Robert F Kennedy is likely to cut into the profitability of many pharmaceutical companies and hospitals. Some feel the government has done little to keep healthcare costs down and improve the health and lifespans of U.S. citizens. Kennedy is looking to change all this. Likely many of the most efficient healthcare companies may also benefit as competition is encouraged across state lines.

ECONOMIC SLOWDOWN FROM GOVERNMENT BELT TIGHTENING

Should we not be concerned that massive government spending cuts may lead to an economic slowdown? Currently we are still enjoying the “Santa Claus” rally spurred on by the economic fuel that was injected into the economy just before the election. But this will not last forever.

Warren Buffett has already freed up massive amounts of cash and short-term treasuries as he sees little he wants to buy at current valuations. From what we can tell, he has yet to prepare for the worst, however. When the worst happens, gold and longer-term treasuries typically perform best. Also, keep in mind that Buffett can no longer buy the small companies that are likely to perform better during the Trump Administration and he readily admits that he does not understand many of the technology companies that have done the best recently.

We are likely to see the economic slowdown we’ve all been waiting for as we cut government spending and tighten our belts next year. We do not know when this party will end as markets continue to push higher. The best months for investing typically start after the October lows and continue to the April/May highs. It’s possible the top will not be in until its time to “Sell in May and go Away”. Many, like Buffett, are already preparing for a selloff and may feel the peak may come sooner.